Due to a manufacturing boom, 2021 is shaping up to be a great year for basic materials stocks. Here are 3 that I like, plus one sector ETF.
Despite some recent weakness, core U.S. leading economic indicators are very strong, with manufacturing booming all over the world. Consequently, expectations of an economic turnaround this year are increasing and have boosted prospects for companies that serve a wide array of critical industries.
A case in point are the various components which comprise the basic materials sector. While basic materials stocks were largely ignored for much of last year, they have rebounded nicely in recent months and are building forward momentum heading into 2021.
Even after showing strength in the last few months, however, material sector stocks are still very much under Wall Street’s radar. As such, they still offer attractive opportunities for both value- and growth-oriented investors. Here we’ll look at some of the strongest segments of this sector, including three specific basic materials stocks and an ETF which should outperform this year.
The materials sector includes firms which mine, develop and process raw materials used in a wide swath of industries (including fertilizers, plastics, paper, metals and concrete). As such, having exposure to these companies is an indirect play on the commodities bull market already underway.
It’s also worth noting that according to consensus estimates from S&P Capital IQ, the materials sector is expected to post per-share earnings growth of 27% this year (compared with the 21% growth rate estimate for the S&P 500 Index).
Indeed, basic materials stocks are in great shape as we head further into what should be a profitable new year for natural resources in general. They should receive a boost from continued U.S. economic stimulus measures (and subsequent weakening of the U.S. dollar) in the coming months. Moreover, a China-led global economic recovery looks to be an even bigger boon for the sector, given China’s voracious demand for industrial commodities.
Moreover, as essential industries, the companies that mine and manufacture basic materials are far less likely to be impacted by economic headwinds or Covid-related shutdowns. Having some portfolio exposure to stocks in this sector could therefore be considered as a safety hedge against volatility in the more economically sensitive areas of the broad market.
3 Basic Materials Stocks (and One ETF) to Buy
One of the easiest ways to establish a position in this sector is by owning a sector-relevant ETF. My favorite one is the Materials Select Sector SPDR Fund (XLB), which seeks to provide investment results that correspond to the price and yield performance of the S&P Materials Select Sector Index. Having a position in XLB provides investors with exposure to a diverse spectrum of basic industries, including commodity and specialty chemicals, packaging and containers, construction materials and specialty mining.
Huntsman Corp. (HUN) manufactures chemicals, including polyurethanes, adhesives and performance products for consumers and industrial customers (including GE, Chevron, Procter & Gamble and BMW).
Management sees demand improving and fundamentals well intact heading into 2021—especially for its construction segment (which includes insulation). The company’s auto business is also on the rebound and showing positive trends, along with nearly all its other end markets.
Huntsman also believes it is well positioned to benefit from anticipated demand in the global insulation market (its single biggest market and likely one of its highest-growth markets in the coming years). Analysts, meanwhile, foresee a 13% bump to the firm’s top line and an eye-popping 107% increase in the bottom line for 2021.
Owens Corning (OC) is a well-known name in the building materials space. It provides building products for residential, commercial and industrial customers, including reinforcement materials for automobiles, rail cars and shipping containers.
The company’s prospects for 2021 are good, with analysts anticipating 8% revenue growth in Q1 and 14% in Q2, along with 55% and 69% earnings growth, respectively, in those same two quarters.
Moreover, the stock trades on just 10 times its current free cash flow and nine times its forward earnings before interest, tax, depreciation, and amortization (EBITDA). Analysts estimate that Owens Corning is poised to generate between $600 and $700 million in free cash flow annually in the coming years. All told, it’s an attractive company.
Rio Tinto PLC (RIO) explores, develops and mines a diverse range of mineral resources, including aluminum, iron ore, copper and diamonds. It also produces several energy-related assets, such as uranium, and has exposure to industrial minerals like borax, titanium dioxide and salt.
Increasing demand for industrial metals from the world’s largest commodity consumer, China, is expected to boost Rio Tinto’s prospects in the coming year, as that nation accounts for a substantial part of the company’s sales. What’s more, analysts expect Rio’s diamonds, energy and minerals businesses to get a boost from a stronger global economy going forward.
The consensus estimate is for revenues to increase 10% in 2021, with earnings expected to rise 14%. Finally, Rio is also a steady and generous dividend payer (current yield of 4.73%), which is icing on an already delectable cake.
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