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What are we looking for?

U.S.-listed materials stocks with attractive fundamentals and earnings growth.

The Materials Select Sector SPDR Fund ETF (XLB) has returned about 7 per cent year-to-date (YTD), making it one of the top performing sectors of 2023 so far, following closely behind the Communication Services Sector Fund ETF (XLC) which is up more than 8 per cent. We were curious about which stocks are outperforming their peers in the U.S. materials sector.

The screen

We used Trading Central’s Strategy Builder to search for stocks indicating attractive valuations and price performance in a sector that is indicating upside price momentum as we start off the 2023 trading year.

We began by setting a minimum market capitalization threshold of US$5-billion to focus on larger, more established companies in the sector.

Next, we looked for companies that are profitable and have an operating margin of 10 per cent or higher. Operating margin is a measure of how much profit a company makes on each dollar of revenue. We also screened for companies indicating a debt-to-equity ratio below 1 in order to focus on companies with reasonable debt levels that interest value investors.

We were also interested in companies that have grown their earnings per share by a minimum of 10 per cent over the past five years.

Stocks that provide dividend income amid a volatile market interest us as dividends help cushion the price return volatility in a bear market, therefore, we screened for materials stocks that are indicating a dividend yield above the average of the S&P 500 Materials Sector Index, which is currently averaging 2.12 per cent. We were pleasantly surprised at the results.

Finally, we screened for materials stocks that have returned at least 5 per cent year-to-date in order to find stocks with upward price performance in the rebounding materials sector.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options, and commodities. Strategy Builder, our stock screener is available through leading retail brokers in Canada and worldwide.

What we found

U.S. Materials stocks shining bright

RANK COMPANYTICKERRECENT PRICE ($)MKT.CAP. ($Bil) P/E5Y AVG. EPS GRTH (%)DEBT/EQTY.OPER.MARGIN (%)DIV.YLD. (%)YTD PERF. (%)1Y PERF. (%)
1BHP Group LtdBHP-N67.3239.88.441.00.3750.529.668.5012.40
2Rio Tinto PLCRIO-N75.35120.76.938.00.2640.849.085.80-0.90
3Ternium SATX-N34.796.82.545.00.1123.357.7613.80-27.60
4Vale SAVALE-N17.982.84.642.00.4543.544.155.5015.10
5Sociedad Quimica Y Minera De Chile SASQM-N84.4124.17.814.00.5651.229.145.7051.70
6Gold Fields LtdGFI-N12.2711.012.136.00.3737.372.7818.6012.40
7Sibanye Stillwater LtdSBSW-N12.188.57.238.00.2426.235.114.30-18.70
8Sasol LtdSSL-N16.5710.44.613.00.6423.935.185.50-11.60
9Huntsman CorpHUN-N31.066.05.828.00.4910.852.7413.00-17.20
10CRH PLCCRH-N44.5232.812.416.00.5412.022.6811.90-17.70

Source: Trading Central

Topping our list is Australian-based resources company BHP Group, which trades on the NYSE. The company is a large producer of commodities, including iron ore, copper, nickel, potash and coal. The company has the largest market cap on our list at US$239.8-billion. Looking at the stock’s current dividend yield, it’s the highest on our list at an impressive 9.66 per cent.

South African-based gold mining company Gold Fields Ltd, has had the best YTD price performance on our list at 18.6 per cent. Gold stocks may be starting to shine amid hopes of a less hawkish U.S. Federal Reserve after favourable U.S. CPI data released Thursday showed inflation has declined six months in a row. Gold, which has historically been a hedge against inflation, has done the opposite amid the current economic regime as gold investors switch to more income-bearing assets amid higher interest rates on risk-free assets. Another factor affecting gold prices has been the U.S. dollar, which has been in a downtrend since posting a 52-week high back on Sept. 28. The price of gold tends to appreciate when the U.S. dollar weakens because the price of the metal becomes cheaper in relation to foreign currencies.

Steel producer Ternium SA, headquartered in Luxembourg, has the highest five-year average earnings-per-share growth rate on our list at 45 per cent and the lowest debt-to-equity ratio on our list at just 0.11. The stock’s price-to-earnings ratio is also the lowest at an impressive 2.5.

Trading Central’s Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had an 8-per-cent annualized return compared with 7 per cent for the S&P 500 index.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Gary Christie is head of North American research at Trading Central in Ottawa.