What are we looking for?
Following the recent dips of the S&P 500 and a trade war looming with U.S. tariffs on steel and aluminium, we look for companies in the materials sector that generate positive economic momentum in the U.S. market and have a better chance of withstanding headwinds in that industry.
We searched for U.S.-listed stocks in the materials sector with a minimum market capitalization of US$1-billion and applied the following metrics:
- The economic performance index, or EPI (return on capital divided by cost of capital) above 1.5. An EPI ratio of one or more indicates a company’s ability to create wealth for its shareholders (An EPI greater than one demonstrates a greater rate of wealth creation);
- A 12-month change in EPI greater than one;
- A positive economic value-added (EVA) change over the past three months. An increasing EVA will display value generation by a company for investors. EVA is calculated by subtracting the capital charge from the net operating profit after tax;
- A positive EVA change over the past 12 months;
- The return on capital and 12-month change in return on capital.
More about Inovestor
Inovestor for Advisors is a research platform application based on the economic profit approach. It aids advisers in quickly identifying attractive investment opportunities and easily communicating them to their clients. In addition to providing detailed reports on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts), Inovestor allows investors to create personalized filters and build custom portfolios.
What we found
Only 12 companies out of 632 made the cut using our set of criteria. We found that chemical-manufacturing companies are showing good economic momentum in the materials sector. Moreover, it looks as if chemical companies are not part of retaliatory discussions worldwide to U.S. tariffs, according to recent talks from politicians around the globe.
Of the 12 companies, only three are U.S.-based. Covestro AG, a spinoff of Bayer AG, is a German-based manufacturer of polymer materials; it stands out as the largest company on our list with a market capitalization of more than US$23-billion.
Covestro started to trade in 2015 and has built momentum on EVA growth and has an impressive return on capital of more than 32 per cent. According to Marcus Mayer from Baader Bank AG, the company should become a DAX member in September. The company is very interesting in a growing industry, but can it continue to perform at this peak for a long time?
Investors are encouraged to conduct their own research before purchasing any of the investments listed here.
Tiffana Paulrajah is an account executive for Inovestor Inc.