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5 Great Basic Materials Stocks to Buy Ahead of Q3 Earnings

Swarup Gupta
Total Q3 earnings for the sector are expected to be up 34.9% on 14.7% higher revenues.

Over the past few years, lukewarm growth and sluggish inflation had removed basic materials from the list of investor favorites. However, this class of stocks has once again caught the imagination of investors. A spurt in inflation and the Trump administration’s policies has skewed the pitch in favor of domestic producers.

Further, earnings and revenues from the sector are likely to improve in the third quarter, which makes it a good idea to pick up select basic materials’ stocks, which are also likely to outperform their earnings estimates.

Inflationary Trends Firmly in Place

In September, the headline PPI index increased by 0.2%, in line with expectations. The increase comes after a 0.1% decline in August. Further, the metric posted a 2.6% year-over-year increase. Core PPI, which excluded the impact of food, energy and trade services increased by 0.4%.

This is the largest increase since a jump of 0.5% in January. The metric also posted a yearly increase of 2.9%. CPI did increase by only 0.1%, less than the expected level of 0.2%. But sustained wage increases over recent months mean that inflation is likely to tick up in the near term.

In September, average hourly earnings registered a year-over-year increase of 2.8%, marginally lower than the 2.9% recorded in August. However, the metric is widely expected to exceed 3% as firms compete to hire an ever smaller pool of workers.

Trump’s Actions Boosting Sector Prospects

Trump’s $1.5 trillion infrastructure plan boosted the price of industrial metals substantially last year. Currently, Democrats are widely expected to win most of the seats in the House of Representatives in the upcoming mid-term election.  Last month, former White House economic advisor Gary Cohn said President Trump will work with Congress to push through a debt-powered infrastructure bill if this does indeed happen.

With the White House firm on pushing ahead with this plan, basic materials’ prices are likely to receive a further boost. Also, while Trump’s tax cuts are likely to boost U.S. Inc. as a whole, his decision to impose tariffs on steel and aluminum are, at the very least, likely to provide a short-term boost to basic materials.

Earnings Prospects Remain Strong

During the second quarter, earnings and revenue growth for basic materials was second only to the energy sector. Total Q3 earnings were up 67.4% on 27.6% higher revenues. This trend is likely to broadly continue this earnings season.

Total Q3 earnings for the sector are expected to be up 34.9% on 14.7% higher revenues, as of Oct 10, 2018. This is second only to expectations for energy and construction. Total Q3 earnings for energy and construction are expected to be up 92% and 39.5%, respectively.

For the S&P 500 index as a whole, total Q3 earnings are expected to be up 18.7% from the same period last year on 7.8% higher revenues. (Read: Banks Provide Positive Start to Q3 Earnings Season)

Our Choices

A steady pickup in inflation and the Trump administration’s actions has boosted the prospects of basic materials stocks significantly. Meanwhile, in keeping with stellar second-quarter results, third-quarter numbers are likely to be impressive.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

You could further narrow down the list of choices by looking at stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Celanese Corporation CE is a global hybrid chemical company.

Celanese has beaten the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 11.5%.

Powered with the right combination of the two key ingredients — an Earnings ESP of +0.62% and a Zacks Rank of 2 — our proven model shows that an earnings beat is expected for Celanese in the to-be-reported quarter as well.

The company is expected to report third-quarter 2018 results on Oct 18.

Cleveland-Cliffs Inc. CLF, formerly known as Cliffs Natural Resources, is the largest producer of iron ore pellets in North America.

Cleveland-Cliffs has beaten the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 47.7%.

Powered with the right combination of the two key ingredients — an Earnings ESP of +0.45% and a Zacks Rank of 2 — our proven model shows that an earnings beat is expected for Cleveland-Cliffs in the to-be-reported quarter as well.

The company is expected to report third-quarter 2018 results on Oct 19.

Bunge Limited BG is an integrated global agribusiness and food company spanning the farm-to-consumer food chain.

Powered with the right combination of the two key ingredients — an Earnings ESP of +5.28% and a Zacks Rank of 2 — our proven model shows that an earnings beat is expected for Bunge in the to-be-reported quarter.

The company is expected to report third-quarter 2018 results on Oct 31.

Domtar Corporation UFS manufactures and distributes a wide array of fiber-based products including communication papers, specialty and packaging papers and adult incontinence products.

Domtar has beaten the Zacks Consensus Estimate for earnings in two of the last four consecutive quarters, with an average positive earnings surprise of 11%.

Powered with the right combination of the two key ingredients — an Earnings ESP of +1.32% and a Zacks Rank of 2 — our proven model shows that an earnings beat is expected for Domtar in the to-be-reported quarter as well.

The company is expected to report third-quarter 2018 results on Nov 1.

CF Industries Holdings, Inc. CF is one of the largest manufacturers and distributors of nitrogenous fertilizer and other nitrogen products globally.

CF Industries has beaten the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 44.6%.

Powered with the right combination of the two key ingredients — an Earnings ESP of +12.07% and a Zacks Rank of 1 — our proven model shows that an earnings beat is expected for Rayonier in the to-be-reported quarter as well.

The company is expected to third-quarter 2018 results on Nov 7.

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Celanese Corporation (CE) : Free Stock Analysis Report
 
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