Turnaround Value?

Earlier this week, a closely watched indicator suggested continuing improvement in the US economy. The Institute for Supply Management’s manufacturing purchasing managers index climbed to 53.9 in December, up from 52.7 in November. The gauge posted its best reading since June, as factory activity showed broad-based growth across a wide range of industries from car manufacturers to coal producers.

Investors were further heartened by improvements in more detailed metrics included in the ISM report, which showed increases in both new orders (the highest since last April) and hiring (which tracked the broader Labor Department payrolls report).

The Canadian economy, by contrast, added fewer jobs than expected in December. Some 17,500 new jobs were created, a marked change from the large net job losses posted in October and November. Still, consensus estimates had called for about 20,000 new jobs. And the unemployment rate edged up to 7.5% from November 7.4% rate.

With GDP growth only flat in October, the tepid jobs report raises suspicions that the pace of Canada’s economic growth has slowed somewhat. Yet despite that, Canadian manufacturing improved in December as both the RBC Canadian Purchasing Managers Index and the Ivey Purchasing Managers Index posted higher readings for December. The RBC index in fact reached an eight-month high, climbing to 54 in December from 53.3 in November, while the Ivey index rose to 63.5 from 59.9 in November.

Despite the provisos and caveats, the factory sectors in both the US and Canada continue to grow. The trend has had a salutary effect on a sector of the stock market that’s been largely ignored lately – industrials. These are the outfits that make, build, and haul stuff around. Over the past year or so, they’ve had a bad rap, on soft earnings and general investor aversion to cyclic issues that depend on economic growth for performance. Well, that might all be changing as North American economic growth is rekindled.

That could present an opportunity for nimble options traders looking to leverage the upside on industrial stocks that haven’t already started climbing. Bullish positions on beaten down Canadian industrials like Bombardier Inc. (TSX: BBD.B, Friday’s close; $4.16) and Finning International Inc. (TSX: FTT, $23.75) could present bold opportunities for aggressive option traders.

With BBD.B look at buying the July 4.50 calls at 40 cents or with FTT, consider a long position with the June 24 calls at $1.85.