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What are we looking for?

U.S.-listed stocks in commodity-related manufacturing industries – the materials sector – that offer attractive valuations and strong earnings momentum.

A resumption of industrial operations after COVID lockdowns has helped push commodity prices higher as demand continues to increase. Companies that turn these commodities into products have so far been able to pass on these increased costs to customers, which safeguards their profit margins. Despite recent market declines, the U.S. materials sector has been outperforming the S&P 500 index since March. The Materials Select Sector SPDR Fund ETF (XLB) has declined a bit more than 18 per cent from its record high back in January and may signal an opportunity to buy companies indicating great value in an outperforming sector.

The screen

Our stock screener Strategy Builder is used to search for U.S.-listed basic materials stocks indicating positive earnings momentum and year-to-date return as well as low valuations.

We started by setting a minimum market capitalization threshold of US$4-billion. Next, we looked for companies with a price-to-earnings ratio of 14 or less. The P/E of the S&P 500 materials sector is 14.4.

We wanted companies that have a history of growing their earnings a share. We searched for stocks that are indicating a five-year EPS growth rate of 35 per cent or higher in order to find companies that are outperforming their peers in the S&P 500 materials sector, which has an average EPS growth rate of 33 per cent.

Finally, we required that both year-to-date and 52-week price performance be positive, and that the stock pays a dividend.

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 around the world.

What we found

U.S. materials stocks with strong earnings momentum

RANKCOMPANYTICKERMKT. CAP. (US$ BIL.) P/E5Y EPS GRTH. RATE (%)DIV. YLD. (%)YTD PRICE PERF. (%)1Y PRICE PERF. (%)RECENT PRICE (US$)
1Steel Dynamics Inc.STLD-Q13.63.7581.916.915.872.05
2Nucor Corp.NUE-N31.04.2561.73.016.5116.46
3Reliance Steel & Alum.RS-N11.16.9392.011.510.8179.77
4Commercial Metals Co.CMC-N4.55.1481.52.618.937.27
5Mosaic Co.MOS-N19.47.6381.133.464.253.61
6Nutrien Ltd.NTR-N48.311.3422.215.642.487.98
7Westlake Corp.WLK-N13.85.5381.110.19.3107.29

Source: Trading Central

The top four companies on the list are in the steel sector, the next two are in agriculture, and the seventh and final entry (Westlake Corp.) is in the chemicals sector.

Topping our list is Steel Dynamics Inc., a diversified steel producer and metals recycler. The company has the highest five-year EPS growth rate on our list at 58 per cent. It also just announced a raise in its second-quarter earnings guidance to between US$6.61 and US$6.65 a share. Analysts had been anticipating US$5.72. The stock has the lowest P/E on our list at just 3.7.

Nutrien Ltd., an agricultural services business and potash producer based in Saskatoon, has the largest market cap on our list at US$48.3-billion. The stock price has been in a strong uptrend since the pandemic lows in March of 2020. While it has pulled back 26 per cent from its record high in April, it still remains well above its 50-week moving average, indicating the uptrend remains intact. The company has the highest yield on our list at 2.2 per cent.

Trading Central Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. The screen described had a one-year performance of 19 per cent compared with a decline of 6 per cent in the S&P 500. Looking at price performance over the past six months amid higher inflation, the strategy returned 14 per cent compared with a decline of 16 per cent for the S&P 500.

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.

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