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5 Best Basic Materials Stocks in the Market Today

Zacks Equity Research

The Basic Materials sector is staging a rebound after remaining in choppy waters in 2015. The sector, which encompasses a broad range of industries, is finally looking up, supported by a string of factors including relatively encouraging U.S. economic data (including gains in the labor market and construction space) and a steady recovery in oil prices.

2015: A Harrowing Year for Materials

The broad-based meltdown in commodities put several industries in the Basic Materials space on a slippery ground last year. 2015 has been a tough year for commodities, battered by turbulent global markets, bearish sentiment over the Chinese economy and a stronger U.S. dollar. Concerns over waning demand from China (the world’s top consumer of raw materials) amid a growing supply glut weighed heavily on commodities, hurting stocks in the Basic Materials space.

Fears that a possible hard landing of the Chinese economy would shrink the country's appetite for raw materials – from oil to metals to cotton – cast a dark shadow over the commodity markets last year. China's move to devalue its currency in an effort to rouse its sleeping economy and push up exports raised concerns about the country's buying power of U.S. dollar-denominated commodities.

The rally in the U.S. dollar also compounded the problems, making goods priced in dollars more expensive for other currencies, mostly for developing countries with weak currencies. The greenback typically has an inverse correlation with most commodities.

Companies in the mining space, for example, grappled with lower prices of metals they deal with. A stronger dollar, slump in oil prices and the climb in U.S. equities led to a more than 11% decline in gold’s value in 2015. With the Federal Reserve finally ending an era of near-zero interest rates with the December lift-off, gold slouched to six-year lows.

Silver suffered a similar fate with prices sliding around 12% in 2015. Prices of copper – a major industrial metal – also tanked roughly 25% last year on concerns about Chinese economic growth rates, supply glut, apprehensions surrounding Europe and continued dollar strength.

Prospects Look Brighter in 2016

Following a harrowing 2015, 2016 has started on a positive note for commodities. Among metals, gold has been the bright spot with prices scaling higher roughly 19% year to date (with most of the gain coming in February), making it the most attractive safe haven asset at present. Silver prices have also notched up a 14% gain while copper is up around 7% so far this year.

The spike in gold prices has also led to a surge in the share prices of many gold miners. Notably, Barrick Gold Corp. ABX and Newmont Mining Corp. NEM have seen their shares jump roughly 106% and 53%, respectively, year to date.

A host of factors contributed to the recent rally in gold prices including concerns over the global economy, dollar weakness, volatility in equities and introduction of negative interest rates by several of the world’s central banks (including Japan) that have boosted demand for bullion.

Gold prices also got a lift (rising 3%) after the Fed left benchmark interest rates steady (in the band of 0.25%-0.50%) on Mar 16 and cut its short-term rate hike expectations to two quarter-point rises from the initial outlook of four hikes citing continued risk from an uncertain global economy and volatile stock markets. The outlook triggered a sharp fall in the U.S. dollar against a basket of rival currency.  

A delay in raising interest rates elevates demand for gold, which produces no income but relies on price appreciation to lure investors. On the other hand, a hike in interest rates tends to boost returns from income generating assets and thus hits non-yielding commodities, including gold.

Another factor that will eventually be a tailwind for gold is that the supply of the yellow metal has already reached peak levels as per reports. Lower gold prices in the past few years and cost pressure had restricted the ability of gold producers to invest in new projects. Production of gold is likely to decline by 3% in 2016, thus ending a seven-year stint of rising output.

Beyond metals, the chemical industry is another favorable area for investment in the materials space. The industry fared reasonably well last year, thanks to continued strong momentum in the automotive market and a recovery in commercial construction.

Despite a spate of headwinds including concerns over China’s economy, weakness in Europe, soft agriculture market fundamentals and weak demand in the energy space, the recovery momentum of the chemical industry is expected to continue in 2016, aided by strength in the light vehicles market, an upswing in the housing sector and significant shale-linked capital investment.

The recent recovery in crude oil prices has also spurred gains in the broader commodity markets as well as materials stocks. Oil prices have rebounded roughly 45% to around $40 per barrel from the 13-year low they hit in Jan 2016. Prices are finding support from expectations of a potential output freeze by major oil producers.

Thus, a number of factors indicate that materials stocks have emerged as an attractive investment option once again after being out of favor in 2015. As such, it would be a prudent idea to zero in on some quality stocks in the materials space that boast healthy prospects.

5 Top Materials Stocks

Finding a stock with the best scores in all categories can better your chances and rate of return. It is here that we ask you to have a look at our new VGM Style Score where ‘V’ stands for Value, ‘G’ for Growth and ‘M’ for Momentum. Notably, the VGM Score rates each stock on their combined weighted styles, helping to identify those with the most attractive value, growth and momentum, across the board.

Back-tested results show that stocks with a VGM Score of A or B and a Zacks Rank of #1 (Strong Buy) or #2 (Buy), garner better returns, on an average, than individual components, as it considers three times as many items that are correlated to stocks returns.

Thus, the VGM Style Score can be a valuable tool for investors allowing them to get a clearer insight into a stock’s strengths and weaknesses. The combination of all three styles that go into the VGM Score make it one of the most comprehensive and best performing indicators to use with the Zacks Rank.

With the help of the Zacks Stock Screener, we have zeroed-in on five stocks in the Basic Materials space with solid prospects. Here's a look at these companies that look good amid the prevailing operating environment and might offer healthy investment returns.

KMG Chemicals Inc. KMG

This Texas-based company is engaged in making and distributing specialty chemicals globally. The stock holds a Zacks Rank #1 and a VGM Score of A.

KMG Chemicals has been seeing positive estimate revision activity over the past two months, as the Zacks Consensus Estimate for 2016 and 2017 has increased roughly 7% and 6%, respectively, over the same period. The company also has expected earnings growth of 33% for the current year.

Silver Standard Resources Inc. SSRI

Canada-based Silver Standard is engaged in the exploration of silver, gold, zinc, and lead deposits. The stock holds a Zacks Rank #2 and has a VGM Score of A.

Silver Standard is witnessing positive estimate revision activity as the Zacks Consensus Estimate for 2016 and 2017 has shot up roughly 500% and 35%, respectively, over the last 60 days. The company also has expected earnings growth of 280% for the current year.

AngloGold Ashanti Ltd. AU

This South Africa-based company is involved in gold mining and exploration. The stock sports a Zacks Rank #2 and has a VGM Score of A.

The company has been witnessing positive estimate revisions over the last 60 days, as the Zacks Consensus Estimate for 2016 and 2017 has climbed around 80% and 85%, respectively, over the same time frame. The stock has expected earnings growth of 252% for the current year.

Golden Star Resources, Ltd. GSS

Canada-based Golden Star owns and operates gold mines in Ghana as well as other parts of the world. The stock sports a Zacks Rank #2 and has a VGM Score of A.

The stock has been seeing positive estimate revisions over the last 60 days. The Zacks Consensus Estimate of loss for 2016 has narrowed roughly 58% over the same time frame. Moreover, the Zacks Consensus Estimate of earnings for 2017 has climbed around 50% over the same period.
 
Sibanye Gold Ltd. SBGL

Sibanye is a South Africa-based gold producer. It is the owner and operator of four major operations, Driefontein, Cooke, Beatrix and Kloof. The stock has a Zacks Rank #2 and a VGM Score of B.

The earnings estimates for the stock are trending up, as the Zacks Consensus Estimate for 2016 and 2017 has catapulted 492% and 306%, respectively, over the past couple of months. The company has expected earnings growth of a staggering 1,161% for the current year.

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