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What are we looking for?

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

Looking at sector performance over the past week, the Materials Sector SPDR ETF (XLB) has returned more than 4.45 per cent, making it the top-performing sector at the time of writing, followed closely by the Real Estate Sector SPDR (XLRE) and the Financial Sector SPDR (XLF). The materials sector had been outperforming the S&P 500 index since a breakout occurred on March 10, before reversing the trend on June 15 and declining 13 per cent, marking a new year-to-date (YTD) low. Has the bottom been confirmed?

The screen

We used Trading Central Strategy Builder to search for stocks in the rebounding U.S. materials sector.

We began by setting a minimum market capitalization threshold of US$5-billion in order 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 more. Operating margin is a measure of how much profit a company makes on each dollar of revenue. We will also screen for a debt-to-equity ratio of 1.0 or less in order to focus on companies with low levels of debt.

We screened for companies that have increased their earnings per share (EPS) by a minimum of 5 per cent over the past five years.

Finally, we were interested in companies that have a minimum TC Quantamental Rating of six out of 10. TC Quantamental Rating uses a combination of valuation, growth, quality, price momentum and income as key metrics when ranking a company.

More about Trading Central

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What we found

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

RANK TICKERCOMPANYRECENT PRICE (US$)MKT.CAP. (US$Bil) OPER.MARGIN (%)DEBT/EQTY.5Y AVG. EPS GRTH (%)P/EDIV.YLD. (%)1Y PERF. (%)YTD PERF. (%)TC QUANT RTNG®
1STLD-QSteel Dynamics Inc83.0115.1626.440.4058.003.711.6416.1034.608.41
2NUE-NNucor Corp141.4937.0727.330.4556.004.381.4115.3025.208.21
3NTR-NNutrien Ltd90.3748.2727.170.4442.007.322.1242.0018.708.07
4RIO-NRio Tinto PLC61.7197.8640.840.2738.005.6811.08-28.30-7.508.06
5WFG-NWest Fraser Timber Co.Ltd92.097.933.690.0656.003.681.3026.80-2.406.67
6MOS-NThe Mosaic Co53.9918.6427.790.3538.006.161.1158.2034.308.01
7TECK-NTeck Resources Ltd32.3716.9945.680.3624.004.081.2040.7011.208.07
8RS-NReliance Steel & Aluminum Co193.9311.6915.320.2739.006.411.8021.2020.208.02
9WLK-NWestlake Corp99.5612.7426.360.5738.004.501.2015.802.108
10CMC-NCommercial Metals Co43.015.1813.750.4948.004.891.3020.5018.407.41

Source: Morningstar CPMS

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.

Topping our list is Steel Dynamics Inc., a diversified domestic steel producer and metals recycler. The stock has rebounded more than 35 per cent since its July low of US$62.60 and has the highest YTD performance on our list at 34.6 per cent. The company also has the highest TC Quantamental Rank on our list at 8.41, and the second-lowest P/E at just 3.71. Looking at five-year EPS growth, the company has the highest on our list at an impressive 58 per cent.

Canadian-based mining company Teck Resources Ltd. has the highest operating margin on our list at 45.68 per cent. The stock price has also rebounded just over 35 per cent from its July low of US$24.75 and is currently just below its 200-day moving average. A breakout could see more upside momentum.

Rio Tinto PLC, a British-based mining and metals company with a listing on the New York Stock Exchange, has the largest market cap on our list at US$97.86-billion. The company has the second-highest operating margin on our list at 40.84 per cent and the highest dividend yield at 11.08 per cent.

Copper futures have rebounded 18 per cent since posting a 52-week low on July 15, which has certainly helped support higher prices of metals and mining stocks.

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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