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What are we looking for?

U.S.-listed basic materials stocks offering low valuations and above-average dividend yields.

The U.S. equity markets saw a volatility spike over the past week, which has sent U.S. indexes tumbling the most since June. The S&P 500 broke below its 20-day simple moving average for the first time since the start of July. As of this writing, the S&P 500 has corrected just over 5 per cent from its record high level of 3,588 on Sept. 2.

Considering Wednesday’s rally, which was the strongest since mid-July, it is unclear whether U.S. equity markets are setting up for a deeper correction, but the break of the 20-day simple moving average is a bearish event that a lot of trend-following traders have been waiting for. What is clear is the sector rotation – something we watch closely at Trading Central. The Technology Select Sector SPDR Fund (XLK) is down approximately 3 per cent on the week, making it one of the worst performing sectors, along with energy, as investors rotate into industrial and materials stocks.

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The screen

With the basic materials sector starting to outperform the broader S&P 500, we used Trading Central Strategy Builder to help us identify U.S.-listed stocks in that sector with higher than average yields and attractive valuations.

We begin by setting a minimum market capitalization threshold of US$2-billion to focus on the largest and most stable materials stocks in the market. Next, we will employ two screening criteria to identify stocks that would be of interest to bargain-hunting investors. Specifically, we will look for companies with a price-to-earnings ratio of 29 (the materials sector average) or less, as well as a price-to-sales ratio of 1.5 or less.

Finally, because we wish to get paid to wait while our investments appreciate, we will also filter for companies offering a dividend yield of 2.5 per cent or greater in order to meet the sector average.

More about Trading Central

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

What we found

Our screener ranks the list based on all performance and revenue criteria. Only nine companies met the strategy criteria.

Topping our list is Eastman Chemical Co., a materials and specialty additives company that had the best overall results when applying our criteria. The stock is also the best performer, with a gain of 12.6 per cent over the past 52 weeks.

Ternium SA makes steel products in the United States, Argentina, Brazil, Colombia, Guatemala and Mexico. Ternium, which has its headquarters in Luxembourg, has the highest dividend yield (6.6 per cent) and the lowest price-to-sales ratio (0.4 per cent).

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Steel Dynamics Inc. is a steel producer and metal recycler in the U.S. The company has the lowest P/E at 11.7. The price-to-sales ratio is below average at 0.7. The stock has a dividend yield of 3.4 per cent.

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.

Select U.S.-listed basic materials stocks

RankCompanyTickerMkt. Cap. (US$ Bil.) P/EPrice/SalesDiv. Yld.1Y Perf. (%)YTD Perf. (%)Recent Price (US$)
1Eastman Chemical Co.EMN-N10.818.91.33.312.6-0.179.50
2Ternium SA (ADR)TX-N3.616.60.46.6-2.4-18.118.35
3LyondellBasell IndustriesLYB-N24.312.00.85.8-10.6-23.172.51
4Steel Dynamics Inc.STLD-Q6.211.70.73.41.3-13.829.32
5MDU Resources Group Inc.MDU-N4.813.30.93.5-14.0-20.323.56
6Comp. Siderurgica Nac. (ADR)SID-N3.911.91.12.5-16.8-15.42.95
7Nucor Corp.NUE-N13.927.60.73.5-10.1-18.245.98
8Nutrien Ltd.NTR-N21.726.01.14.7-25.6-20.638.04
9Avient Corp.AVNT-N2.527.00.92.9-18.1-25.327.67

Source: Trading Central

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

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