Employee Nick Demars makes a wick lubricator for use on locomotives and freight cars at the Miller Felpax Corp. rail parts manufacturing facility in Winona, Minn. (Bloomberg via Getty Images, Getty)

U.S. manufacturers are enjoying a 21st-century renaissance that is riveting stock investors to industrial companies, and many analysts predict this "Made in the U.S.A." theme could be a winner in 2014.

The U.S. economy is recovering slowly but steadily. While productivity and earnings growth aren't expected to soar next year, some surprising recent developments have shifted U.S. industry into higher gear -- especially in the factories and oil fields of America's heartland.

"Middle America," says Liz Ann Sonders, chief investment strategist at Charles Schwab, "is our favorite emerging market."

To explain the stunning economic tailwind behind U.S. industrial companies, and build a solid investment case for the sector, analysts and researchers point to three crucial catalysts.

The Chinese connection

First, the Made in America revival, ironically, was largely made in China. The Chinese economic boom over the past two decades has boosted wages and production costs there, meaning Chinese factory workers' pay, for example, is no longer far below factory pay in the U.S.

As a result, the U.S. now is considered a low-cost, high-quality manufacturing base, according to Boston Consulting Group. U.S. companies operating in China are rethinking offshore manufacturing, with its unpredictable shipping, supply-chain and other bottom-line risks, and increasingly finding that "reshoring" jobs in the U.S. is more economical and stable, BCG says.

Direct beneficiaries of this game-changer include U.S.-based makers of computers, electronics, electrical equipment, appliances, furniture and plastics, BCG notes. Meanwhile, U.S. spending on domestically made goods is growing faster than imports for the first time in two decades, other than during recessions, according to Bank of America Merrill Lynch research. Tellingly, Wal-Mart (WMT) has pledged to buy $50 billion in additional U.S.-made products over the coming decade.

The energy boom

Second, U.S. energy independence is a boon for industrial companies. U.S. oil production in October exceeded imports for the first time in 18 years, according to the U.S. Energy Information Administration. U.S. oil output is expected to top Saudi Arabia's by 2016, the International Energy Agency says.

Cheaper energy gives U.S. industry a substantial competitive advantage over Europe, Japan and emerging markets. Exporters in key areas including chemicals, machinery and transportation equipment are benefiting from this trimmer cost structure, BCG says.

Skills and innovation

Third, the U.S. offers a high level of talented labor, technological know-how and innovation, while wage inflation is low. This combination enhances America's appeal for domestic manufacturers and makes the U.S. a preferred locale for European and Asian companies to "outsource" production and jobs.

"The U.S. has become much more competitive," says Savita Subramanian, equity and quantitative strategist at Bank of America Merrill Lynch. "It's bullish for the U.S. and even more bullish for companies outside of the U.S. that can come here and improve their own margins."

Industrial-sector ETFs

Several exchange-traded funds offer broad, inexpensive exposure to the S&P 500 Index's ($INX) industrials sector, which is concentrated in large-cap aerospace and defense, industrial conglomerates and machinery stocks. The biggest and most briskly traded is Industrial Select Sector SPDR (XLI). The ETF recently held shares of 65 companies, with more than 25% of the portfolio in General Electric (GE), Boeing (BA), United Technologies (UTX) and 3M (MMM).

Vanguard Industrials ETF (VIS) counts those same four stocks as its top holdings, but the fund is spread across 345 issues.

Two other ETFs, iShares U.S. Industrials (IYJ) and PowerShares Dynamic Industrials (PRN), cost more but provide a different perspective on the sector.

The iShares ETF holds around 220 stocks, including "support services" names such as management consultant Accenture (ACN) and payroll-services giant Automatic Data Processing (ADP) that aren't typical of the sector.

PowerShares, meanwhile, divides its industrials ETF among 60 large-, mid- and small-cap U.S. and global stocks -- but with a twist. Instead of traditional stalwarts GE, United Technologies, Caterpillar (CAT) and 3M, top holdings include Delta Air Lines (DAL), Southwest Airlines (LUV) and Honeywell International (HON). The ETF's unique portfolio tracks a proprietary index that PowerShares says rates stocks according to 25 factors, including company fundamentals, stock value, timeliness and risk.

The Made in the U.S.A. revival isn't a new investment idea. Industrial-sector stocks outperformed the S&P 500 this year through November, gaining 34 percent versus 29 percent for the index, including dividends. But industrials and other cyclical areas of the economy have room to run, Subramanian says. In part, this is because economically sensitive stocks typically lead the market when growth picks up and interest rates rise. Many market strategists expect rates to move higher next year, once the Federal Reserve scales back its stimulus program.

"We are in the early innings of this," Subramanian predicts. She recalls a recent business trip through the Midwest, where new factories and heavy truck traffic got her attention.

Says Subramanian: "You have to see it to believe it."

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