The earnings season is just round the corner and is likely to be in full swing in a couple of weeks. It will be interesting to see how the S&P 500 companies perform in third-quarter earnings, especially those belonging to the finance, energy, conglomerates, technology and construction sectors. As of Sep 29, 2017, the S&P 500 players’ earnings and sales are anticipated to grow 3.2% and 5%, respectively.
The S&P 500 companies have fared well, yielding 11.9% return year to date while recording growth of roughly 2.4% since the beginning of the third quarter. Notably, Basic Materials is one of 16 broad Zacks sectors that have performed impressively, riding on the Trump government’s promised growth policies. The sector has outperformed the S&P 500, growing roughly 15.5% year to date and 10.5% since the beginning of the quarter.
Basic Materials Sector – What’s in Store?
Per the Zacks Earnings Preview report dated Sep 29, Basic Materials sector (accounting for 2.1% of the S&P 500 index’s total market capitalization) is likely to record 9.2% growth in revenues. Margins and earnings are expected to fall 1.9% and 13.8%, respectively.
The U.S. economy is strengthening gradually. The country’s Gross Domestic Product grew 3% in the second quarter of 2017, doubling from 1.4% growth recorded in the first quarter. Also, the job market has shown strength, as nearly 156,000 new jobs were added in August. We believe the growing economy and favorable job market conditions will work in favor of the sector. Moreover, the government’s proposed infrastructure investment of $1 trillion, if implemented, will boost the needs of basic materials. Other tailwinds are the strengthening housing, automotive and commercial construction markets.
Also, rise of 2 percentage points in Purchasing Managers’ Index (PMI) or manufacturing index in September and growth of 4.7% in industrial production in the second quarter of 2017 are the positive indicators for the sector.
However, there are certain factors that can jeopardize the prospects of the basic materials stocks. Sharp rise in oil prices can dampen global economic growth and hamper growth opportunities of a number of industries, including transportation, farm machinery, airline and many more. This will indirectly lower demand for basic raw materials used in the manufacturing process in these industries.
Moreover, a high interest rate will make funds more expensive for financing capital-intensive exploration projects and setting of processing plants by the mining and chemical industries. Economic uncertainties in developing nations might hamper export demand for basic materials. Moreover, unfavorable movements in foreign currencies might make other markets more cost competitive than the United States.
Why & How to Invest in the Sector?
Despite the near-term hurdles faced by the Basic Materials sector, we believe that its sub-industries will gain from healthy growth in global economy, better trade relations and effective government policies.
Industries including Chemicals & Fertilizers, Metals-Non Ferrous, Steel and Paper come under the ambit of the Basic Materials sector. Third-quarter to date, metals-non ferrous stocks and steel companies have outperformed the sector with respective growth rates of 13.2% and 13.2%. The other two industries were not far behind, with chemicals stock yielding 8.6% return and paper stocks 6.4%.
We recommend investors seeking exposure in the sector to choose stocks that have the combination of a favorable Zacks Rank of #1 (Strong Buy) or 2 (Buy) and a positive Earnings ESP (the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate). The combination of the dual factors indicates high probability of stocks surprising estimates in the quarter. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Among the filtered stocks, picking companies that witnessed positive revisions in earnings estimates in the past four weeks would be good investment decision.
Stocks Worth Investing
Below we discuss four Basic Material stocks that are worth investing in before the earnings season comes in full force.
Sociedad Quimica y Minera de Chile S.A. SQM – This $15.1 billion company primarily produces fertilizers, industrial chemicals, iodine and iodine derivative products. It anticipates benefiting from its expansionary initiatives in lithium and iodine markets as well as demand growth in potassium chloride business. Year to date, the stock with 100.7% return has outperformed the S&P 500.
The company currently sports a Zacks Rank #1 and has an Earnings ESP of +5.37% for the third quarter. Its Zacks Consensus Estimate has increased 17.6% to 40 cents in the last four weeks.
Kinross Gold Corporation KGC – The company is engaged in the exploration and operation of gold mines. We believe that it is poised to gain from the expansion of Tasiast mine, cost-reduction initiatives and improving cash flow. It currently has $5.2 billion market capitalization and has outperformed the S&P 500, yielding 37.6% return year to date.
It currently carries a Zacks Rank #2 and has an Earnings ESP of +45.83% for the quarter. Its earnings estimates have been raised 100% to 2 cents in the last four weeks. You can see the complete list of today’s Zacks #1 Rank stocks here.
SSR Mining Inc. SSRM – The company, with a $1.3 billion market capitalization, engages in exploration of gold, silver, and mineral properties. It serves a vast customer base in the electronics, coin fabrication, dentistry, jewellery, other industrial, technology, pharmaceuticals and solar energy end markets. Year to date, the stock with 21.1% return, has outperformed the S&P 500.
It currently carries a Zacks Rank #2 and has an Earnings ESP of +69.23% for the quarter. Its earnings estimates have been raised 16.7% to 7 cents in the last four weeks.
Ingevity Corporation NGVT – The company is engaged in the manufacturing and selling of specialty chemicals, carbon materials and technologies. It currently has $2.7 billion market capitalization. The stock has outperformed the S&P 500, yielding 17.8% return year to date.
The company currently carries a Zacks Rank #2 and has an Earnings ESP of +2.94% for the quarter. Its earnings estimates have remained stable at 75 cents in the last four weeks.
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