A lot has been said about reshoring, as companies look to bring manufacturing back to their home countries, particularly the U.S. Yet the ramp up is just getting started, experts believe, so the potential for the trend to drive stock values is not yet fully tapped. Reshoring is essentially companies returning operations to their original country from overseas. Supply chain security, a strong U.S. dollar and government incentives are among the reasons for the uptick, said Brian Belski, chief investment strategist at BMO Capital Markets. “The reshoring craze is real, especially as you continue to hear more and more about this general theme of deglobalization,” he said. “It is a trend that is going to accelerate, especially in the first part of the year,” he added. “The U.S. has learned its lesson during Covid and the lockdown and supply chains breaking.” Reshoring and foreign direct investments are expected to create a record-breaking 350,000 U.S. jobs in 2022, according to the Reshoring Initiative , an advocacy group that tracks manufacturing jobs and foreign investment. Announcements by companies in the third quarter jumped 20% since the second quarter and 150% versus 2019, UBS analyst Chris Snyder wrote in a November note. He pointed to China’s zero-Covid policy and the European energy crisis as two big drivers. “As China’s zero-Covid has dragged on, they’re shutting down, but we’re fully reopening,” Snyder told CNBC. “It’s very difficult for a business or a multinational to have your point of supply and your point of demand be operating under very different playing fields, and that’s made … supply chain very difficult to operate.” Some 87% of U.S. executives with operations in China plan to move production out of the country and about 70% of those are considering the U.S. for relaxation, according to a survey by UBS Evidence Lab. The online survey took place June 10 through July 7 and polled 450 senior executives across the U.S. Even Apple has been moving away from China, said tech investor Gene Munster. Of the 150 new manufacturing locations added in 2021, 79% are based outside of mainland China and 24 of those 150 are in the U.S., he said. “For Apple, it is more about getting out of China than it is about getting into the U.S.,” said Munster, founder and managing partner at Loop Ventures. The company is looking to shift production to India and Vietnam, The Wall Street Journal reported earlier this month. Yet it is semiconductor, auto and tech hardware companies that have been leading the way, according to Snyder. Reshoring announcements from chipmakers soared 500% in the third quarter from the second quarter, while auto was up 100% and tech hardware saw a 45% bump. To lure semiconductor manufacturing back to the U.S., President Joe Biden signed the Chips and Science Act into law in August. It includes more than $52 billion for U.S. companies producing computer chips and billions more in tax credits. ‘Best way forward’ Companies will continue to focus on improving operating efficiencies, reducing costs, preserving cash and sustaining earnings growth — and North America will provide a safe haven, BMO’s Belski said in a Dec. 8 note. “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. He expects sectors that produce products critical to national security — and will therefore be potential beneficiaries of various governments incentives — to be well-positioned to benefit from reshoring. Those sectors are industrials, materials, health care, technology and consumer discretionary. 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 . BMO owns all of these companies. 2023 about ‘derivative plays’ Automation is an obvious beneficiary of reshoring but that’s a theme that has already been around and invested in since 2020, said UBS’ Snyder. That includes names like Emerson Electric and Rockwell Automation . Instead, he thinks 2023 will be all about underappreciated derivative plays. “Some of the electrical names are really underappreciated beneficiaries, because they have so many touch points throughout the process,” he said. “You have to buy electrical products when you’re building a factory. You have to buy electrical products when you’re building out the equipment in that factory. When you’re connecting the grid to that factory, you need electrical components.” The best play on that theme is power management company Eaton , Snyder said. “They sell into the grid. You have to build out the grid when you bring factories online,” he said. “They sell into the construction of the factory, they sell into the equipment of the factory, the automation of the factory.” Keysight Technologies , which provides electronic design and test solutions, is also an interesting play, he said. The company’s equipment is needed for big semiconductor manufacturing plants as companies test chips as they are produced, Snyder said. “As we’re seeing this big build out in semi capacity, that’s driving demand for Keysight’s test equipment,” he said. TE Connectivity and Amphenol are two more names he mentioned. Both have exposure to automation and electric vehicles. Both play into auto, which is one of the best reshoring end markets, he said. “When you build the new auto production facility, their automation businesses make money. Auto is the most automated industrial end market,” Snyder said. “Then they have big EV businesses that get paid once the build out is complete.” — CNBC’s Michael Bloom contributed reporting.
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