The basic materials sector, comprising industries like chemicals, paper and mining naturally has a close co-relation to the business cycle. So when the expansion phase begins, the sector starts doing particularly well.
After that, there’s a period of stabilization as the raw materials supplied are consumed in manufacturing. If the cycle continues to expand, there’s another high-growth phase, and if it drops into a recession, growth also slows down.
An expanding economy is naturally characterized by rising employment levels, which in turn drives strength in housing and autos, as more people spend more on these things when they are doing well.
So although the sector is pretty diverse and also includes industries like agricultural products and fertilizers that might behave somewhat differently, the business cycle is the primary indicator of its strength.
As we already know, the housing market is in a demographics-driven multi-year growth phase, further pushed by pandemic-related demand. Granted that land and labor are limiting factors, but the basic strength here is good news for suppliers of basic materials.
Autos also gained from the pandemic, with the used car segment being the first to take off and followed thereafter by new cars. Environmental concerns and government initiatives are pushing it toward a massive EV upgrade cycle that will also be a multi-year growth driver.
In fact, President Biden’s $2 trillion infrastructure building proposal is one of the best things to happen to this sector because not only housing and autos but also non-residential spending are stated focus areas. Additionally, the intention to reshore operations where possible, will also boost paper/plastic/glass packaging, thereby supporting the suppliers of these materials. The spending will be spread out over a period of eight years and create many opportunities for companies in this sector.
So without further ado, let’s jump to some great stocks-
Year-to-date Price Performance
First up is Yara International YARIY, the world's leading supplier of mineral fertilizers with particular strength in nitrogen based fertilizers. It has local presence across 50 countries and is the number one supplier of liquid CO2 in Europe.
The Zacks Rank #2 (Buy) stock has a Value Score of A, Growth Score A and Momentum Score B, indicating that the stock is attractive for value, growth as well as momentum traders.
What’s more, it belongs to the Fertilizers industry, which is in the top 6%of Zacks-classified industries. And as you probably know, our historical data indicates that the top 50% of Zacks-classified industries outperforms the bottom 50% by a factor of 2 to 1.
The company is expected to grow earnings a respective 20.9% and 26.0% in 2020. The current year EPS estimate is up 10.8% in the last 90 days (it reports on April 22).
Valuation on a P/E basis is also reasonable.
The next three are in the Mining – Miscellaneous industry (top 27% of Zacks-classified industries).
First on this list is Anglo American ADR NGLOY, which offers a broad range of materials including iron ore, manganese, metallurgical coal, copper, nickel, platinum and diamonds through operations across Africa, Europe and the Americas.
The Zacks Rank #1 (Strong Buy) stock has Value and Growth Scores of B and a Momentum Score of F.
It is expected to grow revenue and earnings a respective 40.6% and 168.8% in 2021. The current year EPS estimate is up 50.7% in the last 90 days.
Rio Tinto plc RIO is up next. Through operations in New Zealand, Australia, South Africa, Europe and Canada it sells aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium, dioxide feedstock, diamonds, talc and zircon.
The Zacks Rank #1 company has Value and Momentum Scores of A and a Growth Score of B.
It’s expected to grow 2021 revenue and earnings 42.6% and 76.5%, respectively. The earnings estimate for the year is up 45.5% in the last 90 days.
On a price to forward earnings basis the shares are undervalued.
Sinbanye Gold Limited SBSW, renamed Sibanye Stillwater Limited, is another stock worth considering. Its offerings are in the platinum group metal and gold.
The Zacks Rank #1 stock has Value, Growth and Momentum Scores of B.
It is currently expected to grow 2021 revenue and earnings by a respective 59.3% and 68.0%. The current year EPS estimate is up 22.2% in the last 90 days.
Based on the forward P/E, SBSW has more room to run.
There next pick is in the Chemical – Diversified industry, which is in the top 30% of Zacks classified industries.
Cabot Corporation CBT sells specialty chemicals and performance materials like rubber and specialty grade carbon blacks, specialty compounds, activated carbons, fumed metal oxides, inkjet colorants, aerogel and cesium formate drilling fluids into the transportation, infrastructure, environment and consumer industries.
The Zacks Rank #2 stocks has a Value Score of B and Growth and Momentum Scores of A.
Its 2021 revenue and earnings are currently expected to be up 12.1% and 92.8%, respectively. The 2021 earnings estimate is up 26.1% in the last 30 days. It reports on May 3.
The forward P/E indicates that the shares are undervalued.
A number of sector ETFs are also looking good at the moment. I’ve picked five-
iShares U.S. Basic Materials ETF IYM offers exposure to the U.S. materials sector. It is recommended as part of a sector rotation strategy. This ETF has an AUM of $705.5 million, expense ratio of 0.46, an volume of 38,094 and a dividend that yields 1.31%.
Invesco S&P 500® Equal Weight Materials ETF RTM is an equal-weighted fund offering exposure to equities included in the S&P 500 Materials Index. This includes the chemicals, construction materials, containers and packaging, metals and mining, and paper and forest products industries. Its AUM is $644.1 million, expense ratio is 0.40 and volume is 12,627. Its dividend yields 1.42%.
Fidelity MSCI Materials Index ETF FMAT offers broad exposure to companies involved in the production, extraction and processing of natural resources. Its AUM is $397.5 million, expense ratio is 0.08, volume is 83,371. Its dividend yields 1.46%.
Invesco DWA Basic Materials Momentum ETF PYZ offers exposure to companies engaged in the extraction and production of natural resources. Its AUM is $114.1 million, expense ratio is 0.60, volume is 6,683. Its dividend yields 0.76%.
Vanguard Materials ETF VAW offers exposure to companies engaged in the extraction or production of natural resources. Its AUM is $3058.4 million, expense ratio is 0.10, volume is 83,317. Its dividend yields 1.51%.
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Rio Tinto PLC (RIO) : Free Stock Analysis Report
Cabot Corporation (CBT) : Free Stock Analysis Report
Yara International ASA (YARIY) : Free Stock Analysis Report
Vanguard Materials ETF (VAW): ETF Research Reports
iShares U.S. Basic Materials ETF (IYM): ETF Research Reports
Invesco DWA Basic Materials Momentum ETF (PYZ): ETF Research Reports
Invesco S&P 500 Equal Weight Materials ETF (RTM): ETF Research Reports
ANGLO AMER ADR (NGLOY) : Free Stock Analysis Report
Sibanye Gold Limited (SBSW) : Free Stock Analysis Report
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