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What are we looking for?

U.S.-listed basic material stocks with attractive fundamentals and positive earnings growth.

The materials sector has just hit a new high, year-to-date, after declining 38 per cent since the start of the coronavirus pandemic in February. It could be on the verge of a major breakout toward a new uptrend.

Over the past 30 days, the Materials Select Sector SPDR Fund (XLB) has returned more than 7.5 per cent, making it the top performing sector, ahead of the Health Care Select Sector SPDR Fund (XLV), which is up 4.6 per cent in the same period. (Technology stocks have come under a bit of pressure over the past month but remain positive, with the Technology Select Sector SPDR Fund (XLK) returning 3.4 per cent.)

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The screen

We will be using Trading Central Strategy Builder to search for materials stocks in the S&P 500. The sector includes companies from the following industries: chemicals; metals and mining; paper and forest products; containers and packaging; and construction materials.

We begin by setting a minimum market capitalization threshold of US$5-billion to focus on larger, more established companies in the sector and avoid the higher price volatility that comes with junior materials companies.

Next, we will look for companies that are profitable and have an operating margin of 10 per cent or more. Operating margin is a measure of how much profit a company makes on each dollar of revenue. We will also screen for debt-to-equity ratios of one or less in order to focus on companies with lower levels of debt amid growing global economic uncertainty.

Finally, we will screen companies that have grown their earnings per share by a minimum of 5 per cent annually over the past five years.

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

Our screener ranks the list based on all performance and revenue criteria. The top 10 companies represent the best holdings to meet the strategy criteria.

Not surprisingly, six of the 10 companies on our list are tied to gold. The yellow metal is up more than 18 per cent year-to-date primarily because the coronavirus pandemic has triggered haven demand. Here are two companies that have benefited from higher bullion prices.

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Topping our list is Newmont Corp., the world’s largest gold producer. Newmont produces approximately six million ounces of gold annually with reserves of close to 70 million ounces. It saw a share-price decline of about 24 per cent since the pandemic began but is now up 43 per cent year-to-date. The Colorado-based company is slated to release second-quarter earnings on July 30.

Resource royalty and investment company Franco-Nevada Corp. does not mine for gold, but a major portion of the company’s revenue is sourced from it. Franco-Nevada has the highest operating margin on our list at 50.2 per cent. The Toronto-based company also has the lowest debt-to-equity ratio on our list at 0.02. Second-quarter earnings are expected on Aug. 5.

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.

Selected stocks from the S&P 500 materials sector

RankCompanyTickerMkt. Cap. (US$ Bil.)Oper. Margin (%)Debt/Eqty.5Y Avg. EPS Grth. (%)P/EDiv. Yld. (%)1Y Perf. (%)YTD Perf. (%)Recent Price (US$)
1Newmont Corp.NEM-N49.915.90.3230.213.11.659.143.062.14
2Rio Tinto PLCRIO-N102.035.20.356.812.56.3-0.12.560.87
3Franco-Nevada Corp.FNV-N28.050.20.0221.2154.40.769.343.5148.24
4Gold Fields Ltd.GFI-N9.625.20.7856.958.40.9106.968.011.09
5Air Products & Chem.APD-N62.325.30.2911.532.01.924.520.0281.97
6Albemarle Corp.ALB-N9.218.20.8224.318.21.819.218.686.6
7Agnico Eagle MinesAEM-N15.719.10.5638.537.81.224.56.865.82
8Royal Gold Inc.RGLD-Q8.339.40.048.347.20.911.93.8126.95
9Martin Marietta Mater.MLM-N13.818.40.7129.223.41.0-2.8-20.6222.04
10Vulcan Materials Co.VMC-N16.417.40.5724.626.61.1-10.2-14.2123.53

Source: Trading Central

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

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