Reshoring is accelerating—These stocks should benefit as companies return to the U.S.
Reshoring declarations are amping up, as more companies look to return operations to the United States from overseas. Corporate reshoring announcements jumped 17% in the fourth quarter compared with the prior quarter and are now tracking nearly 300% higher than the fourth quarter of 2021, according to UBS. Supply chain security and government incentives are among the reasons for the shift. "US Reshoring announcements have now come in more than 2x above pre-Covid levels for 10 straight Qs, seeing the trends not only sustain for 2.5yrs but further accelerate supports our 2020 US Reshoring thesis (Deep Dive) that the pandemic would serve as a catalyst for domestic US investment and increased focus on supply chain resiliency (ie automation)," analyst Christ Snyder wrote in a recent research note. In fact, reshoring and foreign direct investments jobs reached a record of at least 360,000 jobs last year, according to the Reshoring Initiative. That's a 35% increase from the previous record in 2021, said Harry Moser, the organization's founder and president. "January 2023 announcements continued at the 2022 pace," he said, noting that he expected the year to be flat due to fewer massive government subsidies and ongoing shortages of skilled labor. The move back to the U.S . can also be seen in corporate earnings, said Ron Graziano, accounting and tax strategist at Credit Suisse. "Companies claiming a lot more earnings back into the U.S., or percentage of earnings that are domestic versus foreign, has grown significantly," he said. Tech giants Meta and Alphabet are among those drastically cutting back their foreign pretax earnings, Graziano's analysis shows. A number of government actions have helped spur the change, starting with the Trump administration's Tax Cuts and Jobs Act, which slashed the corporate tax rate to 21% from 35% and provided tax incentives for U.S-based earnings derived from foreign sales, Graziano explained. The Biden administration's Inflation Reduction Act and Chips and Science Act provided incentives to companies to move operations to the U.S. In addition, the Organization for Economic Cooperation and Development's proposed new global minimum corporate tax also makes it potentially unattractive for multinationals to have earnings overseas, Graziano said. A decade-long theme The move back to the U.S. is just getting started, according to Eli Horton, portfolio manager at Engine No. 1. "We're very early," he said. "This is one of the defining themes over the next decade. I don't think this is a 12-month theme, this has much longer room to run." To capitalize on the trend, his firm recently launched its second actively managed exchange-traded fund, Engine No. 1 Transform Supply Chain ETF (SUPP). The fund covers three broad categories: manufacturing, automation and transportation. Top holdings include Martin Marietta Materials and Willscot Mobile Mini Holdings . The latter is a supplier of storage services and a core portion of their business is the U.S. construction market, Horton said, explaining that storage will be needed as construction activity increases. Rockwell Automation , another top position, is the "brains inside of every factory floor," connecting the equipment, he said. Not only is automation, in general, continuing to grow, there is also increased capital investment. "They've got these great winds at their back. They're the dominant player taking market share," he said, of Rockwell. Then there is Canadian Pacific Railway , which provides critical transportation, Horton said. The company is in the process of acquiring Kansas City Southern, which would create a U.S.-Mexico-Canada rail network. Brian Belski, chief investment strategist at BMO Capital Markets, is also a big believer in the reshoring trend. "We think that supply chains will not only move closer to home but evolve, as there is no longer a 'one size fits all' solution in the face of severe disruptions, but rather, a 'best way forward' as opposed to the accustomed 'cheapest way forward,'" he wrote in a Dec. 8 note. Among the stocks he thinks will benefit are those that will help build new plants and equipment, like AGCO , Illinois Tool Works , Dupont and Freeport-McMoRan . Derivative plays UBS' Snyder is focusing on second derivative plays on reshoring. Automation will clearly be a beneficiary, but he expects that is already fully appreciated by the market. Instead, he likes names such as power management company Eaton . When bringing factories online, you have to build out the grid and Eaton should be a beneficiary, he said. Keysight Technologies , which provides electronic design and test solutions, is also on his list. The company's equipment is needed for big semiconductor manufacturing plants as companies test chips as they are produced, Snyder said. WW Grainger and TE Connectivity are also among his second derivative reshoring plays. — CNBC's Michael Bloom contributed reporting.