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.
Materials stocks are in great shape, as are natural resources in general. They should receive a boost from continued U.S. economic stimulus measures (and subsequent weakening of the U.S. dollar). 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.
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 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).
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. 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. Rio is also a steady and generous dividend payer, which is icing on an already delectable cake.