Editor’s note: Today, we bring you a guest essay from Michael Joseph at Stansberry Asset Management (“SAM”)…

As longtime readers know, SAM is a New York-based money-management firm – separate from our publishing business – that uses the investment research from Stansberry Research and employs our basic investment strategies to manage the portfolios of its clients.

Our founder Porter Stansberry has said this before… Every single Stansberry Research subscriber should consider hiring a professional money manager – not because we don’t trust our own research, but because…

Investing successfully is extremely time-consuming work, and it can be emotionally challenging – even confounding. At every turn, your most basic human instincts will prevail upon you to do the very worst thing, at the very worst time.

Said another way, managing your assets in a world of wild volatility, technological upheaval, growing social unrest, unstable currency values, and more surprises makes the challenges that investors face today greater than ever.

It helps to have assistance from a qualified pro, like Michael…

He is the vice president and deputy chief investment officer at SAM, where his day-to-day work includes sourcing investment opportunities and conducting ongoing due diligence on the firm’s portfolios.

And before joining SAM, Michael worked with high-net-worth private clients for the largest independent wealth-management firm in the country. He was also a senior analyst for one of the largest investment-grade bond managers in the U.S.

In today’s essay, Michael will share insights into how a professional money manager thinks. And in doing so, he’ll present Digest readers with an incredibly overlooked investment idea that few in the mainstream are talking about…

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We begin in northeast Arkansas, at the Big River Steel mill…

You’d be forgiven for assuming that this mill is simply a hollowed-out carcass today, another empty building where a proud and lucrative industry once thrived in small-town America.

But this imagined picture is exactly why good investors push themselves to look beyond their prejudices…

Everyone “knows” the U.S. industrial sector is a dying monolith. Everyone “knows” that the nation’s biggest corporations have moved vast numbers of jobs overseas, decimating a manufacturing sector that was once the envy of the world.

And yet, Big River Steel – headquartered on Arkansas State Highway 198, about a mile west of the Mississippi River near the border with Tennessee – not only employs about 550 people, with an average annual pay of $75,000… but the company plans to add a production line this year that will double employment to more than 1,000 workers.

Industry titan U.S. Steel (X) paid $700 million last fall for 49.9% ownership of Big River Steel, with an option to buy the rest within four years. When the deal happened in October, U.S. Steel valued Big River’s Osceola plant at $2.3 billion.

What’s going on? We believe the answer will prove to be one of the most fascinating – and profitable – investing stories of the next 10 years…

As I (Michael Joseph of Stansberry Asset Management) will explain today, global economic and political winds are blowing back in the favor of this “Made in the USA” industry, even with the new presidential administration.

I call it American “reshoring.”

And the risk that investors can take in certain overlooked manufacturing stocks might well be worth the reward.

But first, let’s talk about how we got here…

Nobody could have imagined the lengthy decline the steel industry was about to face…

You might remember the memorable scene from the movie, The Godfather: Part II… In 1974, the biggest, most impregnable company the screenwriters could imagine was the leader of the steel industry.

“Michael, we’re bigger than U.S. Steel!” fictional mafia don Michael Corleone is reminded by business partner Hyman Roth, when Corleone starts to voice some concern for their casino operation in 1950s Cuba.

Oh, how the mighty have fallen…

This era unfortunately signaled the apex of America’s steel industry. The year the film was released marked the first of many declining years from the peak of steel production in the U.S.

Up until that point, American steel had a storied history. At the turn of the 20th century, J.P. Morgan Sr. financed the merger of Carnegie Steel, Federal Steel Company, and National Steel Company to form U.S. Steel.

The newly formed company began trading on the New York Stock Exchange on April 1, 1901. And it soon became the first company in American history to exceed a billion-dollar market capitalization, which meant a lot more back then than it does today…

To put it in perspective, at that time, a decent meal in New York went for 10 cents.

By 1910, the U.S. became the world’s dominant steel producer, making 24 million tons that year. And industry growth exploded in the decades that followed, into World War II and the immediate years after.

By 1945, the U.S. produced 72% of the world’s steel. And through the 1950s, the steel industry employed nearly 700,000 American workers.

But global competitors steadily gained market share in the 1950s and 1960s…

U.S. production peaked in 1973, when the country produced roughly 252 million tons of iron and steel.

Since then, the industry fell into a steady decline from which it has never fully recovered. Meanwhile, emerging markets – particularly India and China – have driven strong global steel demand for decades.

There are many reasons for the shift…

Some point to the global supply gluts from Chinese “zombie” steel mills that dump cheap, low-quality steel into the market. Others criticize the capital-allocation decisions of the American steelmakers themselves, who were slow to modernize factories.

But without a doubt, the decline of the U.S. steel industry is strongly correlated with the rise of globalization.

What happened to the steel industry is representative of all of American manufacturing…

America dominated the entire global manufacturing industry in the 1940s.

The American manufacturing base played a large part in winning World War II, providing almost two-thirds of all Allied military equipment.

Companies within the defense industry ramped up production, and many outside the industry completely transformed their businesses to support the war effort.

The Consolidated B-24 Liberator, a heavy bomber aircraft, had roughly 100 times more parts than the average automobile. Yet at their Willow Run plant in Ypsilanti, Michigan, Ford Motor rolled one of these long-range bombers off its assembly line every 63 minutes.

(War buffs might recall that flaws in Consolidated Aircraft’s design led the B-24 to be dubbed the “Flying Coffin” by those who flew it. But the ability of Ford to reshape its operations and manufacture them at this pace still borders on the miraculous.)

In the decades that followed the war, Ford – alongside other companies like General Motors, General Electric, and Hewlett Packard – helped to cement American manufacturing’s reputation for high quality and innovation.

But its dominance on the world stage did not last…

By the 1980s, companies increasingly looked to ‘offshoring’ as a way to lower costs and fatten profit margins…

By offshoring, I mean moving manufacturing supply chains or other business lines outside of the U.S.

One of the early movers was Eastman Kodak, which outsourced its information technology infrastructure… paving the way for other large U.S. corporations to do the same. By the 1990s, the idea of moving an entire business overseas was becoming more accepted…

Manufacturing jobs in the U.S. declined from a peak of about 19 million in 1979 to roughly 16.7 million (a 12% decline) by 1982… and dropped again drastically, by roughly 30%, between 2001 and 2009 – a period kicked off by China’s entrance into the World Trade Organization.

The loss of manufacturing jobs in the 2000s happened at a rate worse than in the Great Depression…

Abandoned textile mills, steelworks, and automotive plants began to dot the American landscape as signs of a deteriorating manufacturing base.

At the end of the decade, the U.S. made 45% fewer cars and trucks, 47% less textiles, and 40% less apparel than it did at the start.

Today, the narrative of American manufacturing’s death is well-known and taken by most at face value…

Some of the statistics make it hard to imagine otherwise. Manufacturing jobs represented over 30% of total U.S. employment throughout most of the 1940s and 1950s.

A steady decline has pushed manufacturing’s share to around 8% of U.S. jobs today. It has been more than 13 years since the industries comprising America’s manufacturing base contributed above a single-digit percentage to U.S. employment.

The decline in U.S. manufacturing employment coincides with a loss of leadership on the world stage in some of America’s most iconic industries.

A century ago, America’s steel mills were the envy of every other nation… In 2019, the U.S. ranked fourth in global steel output, with about 88 million metric tons. China, the world leader, made 1,000% more steel than the U.S. that year.

The U.S. automotive industry was the world’s top vehicle producer for most of the last century. That title was lost to Japan in the 1980s… The U.S. regained the top spot and reached peak production in 1999, but then China became the leader in 2008.

A gloomy Bloomberg headline from 2019 announced… “Manufacturing Is Now Smallest Share of US Economy in 72 Years.”

But today, there is another part of the U.S. manufacturing story – and an opportunity – brewing…

First off, is it possible that things aren’t as bad as they seem?

While manufacturing’s share of the U.S. economy had technically reached its lowest point since 1947 at 11% of gross domestic product (“GDP”), the state of American manufacturing is not as dour as the Bloomberg article implied.

Manufacturing’s share of “real GDP” – the inflation-adjusted measure – has been remarkably consistent since 1947, ranging between 11% and 14%. What’s more, U.S. manufacturing output had been trending upward for more than a decade until the COVID-19 pandemic struck, up to roughly $2.2 billion, where it again checked in on a real GDP basis for the third quarter of 2020.

Without a doubt, offshoring has hurt many workers and communities…

American companies have struggled in the face of fierce global competition. Some have closed shop for good. Others have fallen from their perch as global leaders.

But that doesn’t mean all U.S. manufacturing businesses are unhealthy…

The growth of industry in other nations does not mean the death of American manufacturing…

How can this be? Let’s reframe the current position of two industries I’ve mentioned where America is no longer seen as having global leadership.

First, the automotive industry…

The U.S. is the only country in the world besides China that produced more than 10 million vehicles in 2019, the latest year of available data. This statement is true for every calendar year going back to 2012.

In other words, there is still demand to be met.

And whether you feel the valuation is justified or not, American electric-vehicle (“EV”) maker Tesla (TSLA) currently sports a market cap that is roughly the equivalent of the nine next largest global car companies combined. The company already operates manufacturing plants in California, Nevada, and New York… and recently picked Austin, Texas as the home for a factory that will roll out the Tesla Cybertruck and Tesla Semi.

While many EV stocks have already gone parabolic, we have identified other cutting-edge segments within the manufacturing industry with similar high growth potential.

How about the steel industry?

While the U.S. greatly trails China in steel manufacturing, every other country greatly trails China, too.

Case in point, despite America’s shift to a more service-oriented economy, the U.S. still produces more steel than countries like South Korea and Germany, which are renowned for their strong manufacturing economies.

It is true that the U.S faces increased global competition, but that doesn’t have to represent a death knell. We can see that in the growth of companies like Big River Steel in Arkansas.

There is still global demand for steel… In fact, annual production rates have more than doubled since the 1980s. Even with this increased capacity, prices for iron ore, a key ingredient in steelmaking, are up more than 90% in the past 12 months.

A drop in manufacturing employment doesn’t mean the ‘end of industry’ either…

When contrasting the relative stability in U.S. production with steadily falling employment numbers, it becomes clear that U.S. manufacturers are doing more with less.

Automation is a primary reason. Robots in factories are no longer the stuff of science fiction. As a result, manufacturing has become much more capital-intensive and much less labor-intensive.

And there are certain emerging technologies that stand to become more widespread because of this…

With a need to maintain profitability and the cost of taking on debt near historic lows, U.S. manufacturers may be driven to invest in automation. There are a host of stocks in this realm that operate on the software and hardware sides of industrial productivity solutions.

Let’s go back to the remote corner of northeast Arkansas where we began today’s Digest…

Big River Steel isn’t the only steel mill expanding in Mississippi County… So is Nucor (NUE). And Nucor and U.S. Steel are among the top steel producers in the U.S. today.

(I want to be clear, we are not suggesting you buy shares of these two – or any other –specific companies today… We mention them only to make a broader point about an important investing idea.)

This area of northeast Arkansas is the second-largest steel-producing region in the U.S today… And its role will only expand, as Nucor plans to add a new production line by 2022.

With this new production line, the company will be able to compete in new markets like roofing and siding, light fixtures, and appliances… And it will boost its existing business lines like heating, ventilation, air conditioning (“HVAC”), and garage doors.

According to the Northwest Arkansas Democrat-Gazette, the steel sector in the rural region known for its lush farmland “employs more than 3,000 workers, and at least another 1,200 employees work in businesses that directly serve or support steel mills in the region.”

Investments have also been made in the region’s infrastructure, which already offers easy access to the Mississippi River and Interstates 40 and 55. Big River built 14 miles of rail line, which connects to major rail systems and helps the flow of goods and materials.

And in the bigger picture, Big River bills itself like this… “At our core, we’re a technology company. We just happen to make steel.”

As the Democrat-Gazette reported earlier this month…

The 21st-century steel industry no longer carries the stigma of smokestacks and fiery furnaces. Plants are embracing robotics, computerization and artificial intelligence, working to become smart mills powered by technological advancements as much as by human labor.

Big River Steel has set a goal of becoming the nation’s first smart mill by using artificial intelligence to detect and correct production errors swiftly, creating greater operating efficiencies and reducing downtime at the facility.

Another evolution is an emphasis on becoming friendlier to the environment. Big River’s Osceola facility was the first steel mill to receive the Leadership in Energy and Environmental Design certification.

That designation is a green initiative more commonly associated with office buildings or public spaces.

Said another way… U.S. manufacturing is not dead, it’s just different.

With that in mind, here’s the big investing point I want to get across today…

The idea that American manufacturing is healthier than believed – or is headed that way – is contrarian…

And this means opportunity.

This is what we look for at Stansberry Asset Management…

Most investors are down on the prospects of U.S. manufacturing.

But the most profitable time to invest in a sector, and the stocks within it, is often when it has fallen out of favor with the investing public…

Importantly, though, you have to know which parts of a sector are worth investing in and which ones aren’t worth touching… That’s what we’ve done in a new free report on American “reshoring” that we’re excited to share with you today.

As we write in the report, there is a lot of uncertainty in the investing landscape today, but…

One of the trends we feel highly certain about in the years ahead is an increase in reshoring – that is, domestic companies returning manufacturing supply chains back to the United States. In this paper, we’ll explain why we expect to see this occur, what it could mean for the broader stock market, and how a few specific segments of the investment universe stand to benefit.

There are significant tailwinds arriving for certain manufacturing stocks…

The report discusses the many factors we believe are likely to lead to a resurgence in U.S. manufacturing.

In addition to steel, this report details several other investable areas to capitalize on before this potential resurgence becomes apparent to the investing public.

Take drug manufacturing, for example. As we write…

The COVID-19 pandemic brought to light the fact that about 90% of the core ingredients that go into many commonly used drugs in American hospitals are manufactured in China.

This became a liability for a lot of folks in the U.S. as the pandemic began to unfold… And President Joe Biden has introduced plans for strengthening supply chains in this area “at home.” As we write…

This includes building a domestic network to secure supplies to battle COVID-19 as one might expect, but also focusing on supply chains crucial to target areas…

The Biden administration is pushing for $2 trillion in infrastructure spending, including massive efforts in green energy, the auto industry, transit, and housing sectors… And his plan proposes tax breaks for companies that bring manufacturing back to the U.S., which could play into a broad range of markets – like steel.

That’s why it’s worth knowing the details about what you should consider if you’re looking at investments in the steel industry today… or other related manufacturing concepts – like automation and more.

At Stansberry Asset Management, our approach entails investing in securities we believe have a favorable asymmetric risk-reward profile on a probability-adjusted basis.

In other words, we’re taking the smartest chances we can.

As we write in the report, assigning probabilities is no easy task when the future is so murky. And in uncertain environments like we’re experiencing today, we ask ourselves what investing themes are likely to hold true over the longer run…

Today, one of those themes is American “reshoring.”

And we’re happy to share the details in our new report, free of charge, with Stansberry Research subscribers…

We share the sectors that we believe are most likely to benefit from a resurgence in U.S. manufacturing… how the Biden administration’s new plans encourage the trends I’ve talked about today… and investing ideas that might have a place in your own portfolio.

At the very least, I hope the report will give you some investing ideas to consider, as well as insight into how a professional manager like Stansberry Asset Management thinks about the markets and investing. Click here to download your copy for free right now.

New 52-week highs (as of 1/29/21): First Majestic Silver (AG), Nuveen Municipal Value Fund (NUV), and Silvergate Capital (SI).

The mailbag will pick back up tomorrow.

 

Best regards,

Michael Joseph, CFA

New York, New York

February 1, 2021

 

Published on Stansberry Research.