After a turbulent 2015, it has been a comeback year for the basic materials sector, with precious metals especially gold and silver grabbing the limelight thanks to their safe-haven appeal. However, there have been other drivers for the sector, which encompasses a broad range of industries ranging from mining and metals to chemical products.
Chemical Industry Gaining Momentum
If we were to look beyond precious metals, the chemical industry – a favorable area for investment in the materials space – comes naturally to mind. The U.S. chemical industry, a nearly $800 billion enterprise, is heavily linked to the overall condition of the nation’s economy. It has been consistently leading the U.S. economy’s business cycle due to its early position in the supply chain.
The shale gas boom and abundant supply of natural gas liquids have been a huge driving force behind chemical investment in plants and equipment in the U.S. and have provided American petrochemical producers a compelling cost advantage over their global counterparts. The American Chemistry Council expects this to drive export demand and new capital investment in the country.
The industry fared reasonably well last year riding on the back of continued strong momentum in the automotive market and a recovery in commercial construction despite a spate of headwinds including soft agriculture market fundamentals, slowdown in China, lumpiness in Europe, a stronger dollar and depressed demand in energy markets.
The momentum has continued through the first half of 2016. The U.S. auto industry is in high gear as new car and light truck sales are expected to reach 17.7 million units in 2016 on reduced gasoline prices and low interest rate on auto loans, as per the National Automobile Dealers Association’s (NADA) estimates.
Further, underlying demand trends in the housing space remain strong and homebuilding is expected to pick up pace, supported by an encouraging job picture, affordable interest/mortgage rates and an improving economy. The American Institute of Architects (AIA) expects healthy growth in non-residential construction spending this year based on strong demand for hotels, office space, manufacturing facilities and amusement and recreation spaces.
Steel Industry Showing Resilience
Strong fundamentals in automotive and construction will also favor the steel industry. U.S steel demand is projected to grow 3.2% this year. Even though the U.S. steel industry is continuously threatened by cheaper imports, imposition of anti-dumping duties will help homegrown steel makers to defend their turf against illegally dumped steel products. India will be a growth driver given its progressive construction and manufacturing sectors, rapid urbanization and structural reforms.
What do the Numbers Say?
A preview of second-quarter earnings for the Basic Material sector reveals a projected decline of 16.4%, following a 15.9% year-over-year plunge in the first quarter. However, there is a silver lining with the sector expected to enter the positive territory in the back half of the year with 4.4% and 15.6% growth in the third and fourth quarters, respectively. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.).
Thus, the basic materials sector has high chances of winning back investors’ favor. It would be a prudent move to zero in on some growth stocks in the materials space right now.
How to Pick the Right Stocks?
With the help of our new style score system, we have zeroed in on six stocks that look promising based on their solid Zacks Rank and favorable Growth Style Score. Our Growth Style Score condenses all the essential metrics from a company’s financial statements to get a true sense of the quality and sustainability of its growth. Our research shows that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best investment opportunities in the growth investing space.
Strong Chemical Picks
Headquartered in Atlanta, GA, Axiall Corporation manufactures and markets chemicals and building products in the United States as well as globally.
This Zacks Rank #1 stock with a Growth score of A has gained 110.39% year to date. Moreover, over the past 30 days, its estimates have moved north an impressive 300% for the current fiscal and 13% for the next. Moreover, the company has estimated long-term earnings growth of 5%. The stock also has an impressive four-quarter trailing surprise of 174.8%.
Flexible Solutions International Inc. (FSI - Free Report)
Headquartered in Victoria, Canada, Flexible Solutions International, Inc., together with its subsidiaries, develops, manufactures, and markets specialty chemicals that slow the evaporation of water.
This Zacks Rank #2 stock with a Growth score of A has gained 55.78% year to date. Its earnings estimate for the current year has moved north 8% over the last 60 days. For the next year, estimates have moved up 18%.
Koppers Holdings Inc. (KOP - Free Report)
Headquartered in Pittsburgh, PA, Koppers Holdings Inc. provides carbon compounds, wood treatment chemicals, and treated wood products and services in the United States and internationally.
This Zacks Rank #1 stock with a Growth score of A has gained 69.04% year to date. Its earnings estimate has gone up 4% for the current year and 4% for the next year over the last 90 days. The company has estimated long-term earnings growth of 10%. Koppers has delivered a positive earnings surprise of 59.17% over the last four quarters.
Potential Steel Winners
Ryerson Holding Corporation (RYI - Free Report)
Chicago, IL-based Ryerson Holding, along with its subsidiaries, is engaged in the processing and distribution of metals like stainless steel, aluminum, carbon steel, and alloy steels.
Ryerson sports a Zacks Rank #1 and a Growth score of A. The stock has surged 294% year to date. 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 54% and 14%, respectively, over the same time frame. The company has delivered an impressive average positive surprise of 118.19% in the last four quarters.
AK Steel Holding Corporation (AKS - Free Report)
Headquartered in West Chester, OH, AK Steel is a leading producer of flat-rolled carbon, stainless, electrical steel and tubular products.
AK Steel Holding has a Zacks Rank #2 and a Growth Score of A. The stock price has gained 115.63% year to date. The bottom-line estimate for the current year has recovered dramatically over the last 30 days from a loss of 13 cents to earnings of 16 cents. For fiscal 2017, estimates have increased 23% over the said time period. The company has estimated long-term earnings growth of 5% and also has an impressive four-quarter trailing surprise of 127.34%.
Trinseo SA (TSE - Free Report)
Headquartered in Berwyn, PA, Trinseo S.A. manufactures and markets synthetic rubber, latex, and plastic products.
The stock carries a Zacks Rank 2 and a Growth Score of A. It has appreciated 59.86% year to date. Its estimates have moved north 1% for 2016 over the past 30 days. The company has a four-quarter trailing surprise of 2.22%.
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