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3 Inflation Fighting Stocks in the Basic Materials Sector

·5 min read

When considering stocks to add to the portfolio, investors should often times consider the industry that the stock is in. The Basic Materials sector for instance contains a variety of top ranked industries. Business in these industries are robust as raw materials are used to make an endless number of products that reach a multitude of end markets.

This makes many stocks in the Basic Materials sector viable investments. Also, it is important to note that despite inflation, many of these companies still have pricing power due to the essentials of the raw materials.

Let’s take a look at three stocks in the sector that are also part of booming industries as well.

Clearwater Paper (CLW

An essential raw material producing company for investors to consider is Clearwater Paper (CLW). CLW manufactures quality paperboard which is essential for construction and packaging purposes, consumer tissue, and wood products.

CLW has direct access to the public capital markets as it is a premier supplier of private label tissue to major retail grocery chains, and produces bleached paperboard used by quality-conscious printers and packaging converters.

CLW’s stock is up +11% year to date compared to the S&P 500’s -18% drop. CLW’s YTD performance has become somewhat of a defensive shield for investors amidst inflation, as over the past five years the stock is actually down 12% to underperform the benchmark. CLW’s hedge against volatility becomes clearer when looking at its 1-year performance, with the stock up +21% and the benchmark down -13%.

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Zacks Investment Research

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Also significant to note, CLW has established its dominance as an industry leader over the last year. Unlike the CLW’s solid performance, its peer group is down -24% over the last year and -32% YTD. With that being said, the business outlook for both CLW and the broader Paper and Related Products Industry is looking up. The industry currently ranks in the Top 12% of over 250 Zacks Industries.

At current levels, CLW’s forward P/E of 9.9X is higher than the industry average of 7.7X. However, this is a lot lower than the high of 57.9X it saw earlier in the year and slightly below the median of 10.6X.

CLW’s earnings are expected to climb an impressive 298% at $4.10 a share in 2022, based on Zacks estimates. However, Fiscal 2023 earnings are expected to be down 30%, but sales are expected to up 2% at $2.18 billion. Sales for this year are also expected to climb 21%.

Despite the drop in FY23 earnings, CLW currently lands a Zacks Rank #1 (Strong Buy) as analysts have been steadily raising their earnings estimates.

CSW Industrials (CSWI)

CSW Industrials manufactures and sells industrial products, coatings, sealants, adhesives and specialty chemicals. The company also offers essential HVAC mechanical, building and fire/smoke prevention, lubricating and filtration equipment for commercial construction, HVAC and rail companies.

CSWI’s Chemical-Specialty Industry currently ranks in the top 25% of over 250 Zacks Industries. CSWI is up a respectable 4% YTD to outperform the S&P 500. Even better, over the last five years, CSWI is up a stellar 199% to crush the benchmark.

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Zacks Investment Research

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Currently trading around $126 a share, CSWI has a forward P/E 20.4X. The industry average P/E is 13.5X, however CSWI still trades at a discount to its five year high of 40.2X and median of 24X.

CSWI earnings are expected to climb 41% at $6.19 a share in 2022, according to Zacks estimates. Fiscal 2023 calls for another 5% earnings growth. Top line growth is also expected, with sales set to jump 19% this year and another 7% in FY23 to $799.56 million.

CSWI currently sports a Zacks Rank #1 (Strong Buy) with earnings estimates on the rise.

Livent (LTHM)

Another stock to consider out of the Basic Materials sector is Livent Corporation (LTHM). Livent produces and distributes lithium chemicals applied in batteries, agrochemicals, aerospace alloys, greases, pharmaceuticals, polymers, and various industrial applications.

LTHM’s performance has been impressive YTD at +44% to blast the benchmark. Livent’s performance year to date has shown the stock to be a safe haven against inflation. LTHM is also up +107% over the last five years to outperform the S&P 500 at +61%. LTHM is a part of the Chemical-Specialty Industry as well, which is currently in in the top 25% of Zacks Industries.

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Zacks Investment Research

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LTHM currently trades around $35 a share with a forward P/E of 24.3X. Despite the industry average of 13.35X, the growth prospects for LTHM remain stellar. In addition to its growth prospects, LTHM’s forward P/E is significantly lower than the high of 226.6X it saw earlier in the year and median of 41.5X.

Livent’s earnings are projected to climb an outstanding 666% this year at $1.38 per share. Fiscal 2023 calls for another 30% earnings growth. Also, top line growth is expected to be 102% this year and another 28% in FY23 to $1.09 billion. Plus, LTHM has numerous estimate revisions to the upside over the last 60 days.

LTHM currently lands a Zacks Rank #1 (Strong Buy) with estimate revisions on the rise.

Bottom Line

The Basic Materials sector has provided defensive safety as investors are cautious of other areas of the market due to inflation. The Basic Materials sector includes several Zacks top ranked industries. Many of the stocks in these industries have outperformed the broader market due to their pricing power.

Despite inflation, these stocks have the ability to perform well because of the essentials of raw materials.

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