Yahoo Finance 7 Basic Materials Investments to Buy in 2017
The basic materials sector may not be sexy, but it is poised to outperform in 2017. This sector posted strong gains at up 14.1 percent in 2016, versus a 9.5 gain in the Standard & Poor's 500 index, and may just be gathering steam.
The materials sector includes commodity-oriented, non-energy companies and that includes mining and metals, chemical producers and forestry and paper products.
On the whole, this group tends to be an outperformer during the mid-to-late portion of the economic cycle and their price performance is highly correlated with inflation, says Sam Stovall, chief investment strategist at CFRA in New York.
The current expansion started in June 2009, and is now twice as old as the average economic expansion since 1900. "On a year-over-year basis, core CPI has risen from 0.9 percent in July 2016 to 1.7 percent in November. Inflation is expected to pick up as the year progresses," Stovall says.
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During his campaign, President-elect Donald Trump proposed to spend $1 trillion to repair the country's roads, bridges, and other infrastructure over a 10-year period. The materials group will benefit from a pick-up in U.S. infrastructure spending.
"The new administration appears determined to prioritize increased fiscal spending on infrastructure and improve the overall business climate through reducing burdensome regulations and tax reform," says Matt Kennedy, senior portfolio manager at Angel Oak Capital Advisors in Atlanta.
New household formation driven by millennials is another factor which will support the materials sector ahead, Kennedy says. Millennials, born from the early-1980s to the mid-1990s, are just entering their early 30s and should drive new household formation and increased demand for housing, Kennedy says. That in turn supports demand for building materials, which are found in the materials sector.
[Read: 7 Stocks That Should Grow With Millennials.]
CFRA Research recommends an overweight to the materials sector amid forecasts for strong above-market earnings-per-share growth in 2017.
There are a variety of ways that investors can increase exposure to the materials sector, including exchange-traded funds or individual company stocks. Choosing an ETF can simplify the investment process and help investors avoid specific company-risk. "It puts investors in the right neighborhood without having to worry about the wrong block", Stovall says.
Materials Select Sector SPDR ETF (XLB). CFRA currently holds an overweight recommendation for the XLB, which invests in every basic materials company in the S&P 500 and weights the holdings by market capitalization. Top holdings of these ETF include Dow Chemical Co. ( DOW), E.I. du Pont de Nemours ( DD), Monsanto Co. ( MON), Praxair ( PX) and Air Products & Chemicals ( APD). It has a low expense ratio of 0.14 percent, or $14 annually for every $10,000 invested.
Canfor Corp. and West Frasier Timber Co. Morningstar forecasts housing demand from the millennial generation will drive strong construction activity through 2020. "We believe lumber producers will prove the best way to play resurgent housing demand," says Daniel Rohr, director of basic materials equity research for Morningstar in Chicago. "Rising construction activity should boost profitability for producers like Canfor and West Fraser Timber as capacity utilization pushes prices higher." Both companies trade on the Toronto Stock Exchange.
Barrick Gold Corp. (ABX). CFRA has a five-star "strong buy" recommendation on Barrick Gold, which is one of the world's largest gold companies in terms of both production and reserves. Spot gold prices closed out 2016 up 13.4 percent, according to CFRA. Looking ahead, CFRA forecasts company revenue up more than 5 percent in 2017 on higher gold prices. CFRA shows a 12-month price target at $26 on ABX stock.
Vulcan Materials Co. (VMC). Vulcan is the country's largest producer of construction materials including crushed stone, gravel and sand. It also produces asphalt mix and concrete. The company shows a five-star "strong buy" recommendation from CRFA, which forecasts private construction spending to grow more than 10 percent. Steady growth in public construction spending on highways and other infrastructure projects is expected to fuel rising demand for VMC's products. CFRA shows a 12-month target at $160.
Martin Marietta Materials (MLM). CFRA also shows a five-star "strong buy" recommendation on Martin Marietta Materials, which is the second-largest U.S. producer of construction materials, including granite, limestone, sand and gravel. CFRA forecasts strong revenue growth of 15 percent in 2017. Martin Marietta will benefit from rising housing demand and also from infrastructure proposals including new federal highway spending. CFRA shows a 12-month price target at $255 on MLM stock.
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Steel Dynamics (STLD). Steel Dynamics holds a five-star "strong buy" recommendation from CFRA. The company produces a variety of steel products and also joists, girders and decking used in construction. CFRA says Steel Dynamics will benefit over the medium term from continuing growth in construction and automobile construction, with forecasted sales up 13 percent in 2017. CFRA shows a 12-month price target at $45 on the STLD stock.
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