Top Materials Stocks

The materials sector includes companies that discover, develop, and process raw materials used in industries such as steelmaking, farming, and construction. Materials stocks include manufacturers of plastics, fertilizers, paper, concrete, and metals. Prominent companies include Ecolab Inc. (ECL), Air Products and Chemicals Inc. (APD), and DuPont de Nemours Inc. (DD).

Metals and other commodities rose after Russia's invasion of Ukraine in February, fueling rallies in selected materials stocks. In the past two months, prices for commodities such as lumber and cotton have pulled back due to inflation, interest rate hikes, and concerns about a recession.

Materials stocks, represented by the benchmark Materials Select Sector SPDR Fund (XLB), posted a total return of -13.4% over the past 12 months compared with -17.2% for the Russell 1000. These market performance numbers and all statistics in the tables below are as of Oct. 24, 2022.

Here are the top three materials stocks with the best value, the fastest growth, and the most momentum.

Best Value Materials Stocks

These are the materials stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows that you're paying less for each dollar of profit generated.

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• United States Steel Corp.: United States Steel makes and sells slabs, plates, sheets, and tubular products to industries including energy, automotive, and construction in the North America and Europe.
• Cleveland-Cliffs Inc.: Cleveland-Cliffs makes products including flat-rolled steel, iron ore pellets, and stainless steel tubing. Cleveland-Cliffs announced on Oct. 25 that net income plummeted year-over-year (YOY) as revenues dropped in the third quarter. The company said that high project costs affected its financial results and will taper off in the fourth quarter.
• Nucor Corp.: Nucor makes products including steel, sheet steel, plate steel, concrete and reinforcing bar. It also sells raw materials. The company will pay its next quarterly dividend of $0.50 a common share on Nov. 10 to shareholders as of Sept. 30, 2022.

Fastest Growing Materials Stocks

These are the top materials stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly year-over-year (YOY) percentage revenue growth and most recent quarterly YOY earnings-per-share (EPS) growth. Both sales and earnings are critical factors in the success of a company. Therefore, ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one figure or the other unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of more than 2,500% were excluded as outliers.

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• CF Industries Holdings Inc.: CF Industries Holdings is a manufacturer of nitrogen and phosphate fertilizer products worldwide. It sells ammonia, urea, urea ammonium nitrate solution, and ammonium nitrate.
• MP Materials Corp.: MP Materials operates mining and processing facilities, and produces rare earth materials such as lanthanum, cerium oxides, and carbonates. Net income nearly tripled year-over-year (YOY) as revenue nearly doubled in second-quarter results released in August. Higher prices were a key driver of the gains. MP Materials reports third quarter financial results on Nov. 3.
• The Mosaic Co.: The Mosaic Co. is a global producer and marketer of concentrated phosphate and potash, which are crop nutrients. It has customers in 40 countries. The Mosaic recently announced that it will pay a quarterly dividend of $0.15 a common share on Dec. 15 to shareholders as of Dec. 1.

Materials Stocks with the Most Momentum

These are the materials stocks that had the highest total return over the past 12 months.

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• CF Industries Holdings Inc.: See above for company description.
• Steel Dynamics Inc.: Steel Dynamics sells flat-rolled steel sheet, structural beams, bars, and recycled metals. The company announced in early October that it completed the acquisition of ROCA ACERO S.A. de C.V., a Mexico-based metals recycling company. The purchase will boost Steel Dynamics' scrap processing capability in Mexico to more than 2.5 million gross tons annually. Financial details of the transaction were not disclosed in its press release.
• Corteva Inc.: Corteva provides seed and crop protection solutions globally to agricultural customers in 140 nations. Its services include protecting crops from weeds, insects, and disease.

Advantages of Investing in Materials Stocks

Core Demand: Materials companies provide products, such as metal, concrete, and chemicals, that are the foundation of the global economy. As the world recovers from the COVID-19 pandemic, governments are investing significantly in infrastructure and construction to stimulate economic growth, resulting in demand for a wide range of materials. Moreover, consumers are spending pent-up savings on building and remodeling homes, which has led to a rush on materials like lumber, steel, and cement. For instance, at the height of the pandemic, the iShares Global Timber & Forestry ETF (WOOD) that tracks lumber companies more than doubled amid surging demand for timber.

Portfolio Hedge: Materials companies that mine for precious metals, such as gold and silver, provide investors with a partial hedge against cyclical holdings in their portfolio, often outperforming during market downturns. Conversely, cyclical materials stocks like oil and gas producers that are more closely tied to the economy’s health typically outperform during periods of economic expansion. 2022 is an outlier year, however, with energy outperforming other sectors year to date (YTD) on the back of Russia’s invasion of Ukraine and increasing travel demand after the pandemic.

Risks of Investing in Materials Stocks

Rising Costs: Materials companies face periods of rising costs that can crimp earnings, especially if they coincide with falling commodity prices. Mining and developing resources is capital intensive. Supply chain disruptions, rising fuel costs, and machinery maintenance can cause significant challenges, particularly during periods of spiking inflation. For example, pandemic-related shipping snarls in 2021 saw the benchmark price to ship copper in the U.S. reach its highest level since 2003.

Industrial Action: Certain industries within the material sector, such as mining, are heavily unionized, increasing the risk of industrial action that can temporarily suspend or reduce operations. A reduction in output has the potential to impact a mining company's earnings which can put downward pressure on its share price. In 2021, iron-ore mining giant Rio Tinto Group (RIO) had to reduce one of its mines to 25% capacity for several months due to strike action, which union officials claimed cost the company around $5 million daily.

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