Think Beyond Precious Metals: 6 Basic Materials Stocks To Buy

After a turbulent 2015, it has been a comeback year for the basic materials sector, with precious metals especially gold and silver grabbing the limelight thanks to their safe-haven appeal. However, there have been other drivers for the sector, which encompasses a broad range of industries ranging from mining and metals to chemical products.

Chemical Industry Gaining Momentum

If we were to look beyond precious metals, the chemical industry – a favorable area for investment in the materials space – comes naturally to mind. The U.S. chemical industry, a nearly $800 billion enterprise, is heavily linked to the overall condition of the nation’s economy. It has been consistently leading the U.S. economy’s business cycle due to its early position in the supply chain.

The shale gas boom and abundant supply of natural gas liquids have been a huge driving force behind chemical investment in plants and equipment in the U.S. and have provided American petrochemical producers a compelling cost advantage over their global counterparts. The American Chemistry Council expects this to drive export demand and new capital investment in the country.

The industry fared reasonably well last year riding on the back of continued strong momentum in the automotive market and a recovery in commercial construction despite a spate of headwinds including soft agriculture market fundamentals, slowdown in China, lumpiness in Europe, a stronger dollar and depressed demand in energy markets.

The momentum has continued through the first half of 2016. The U.S. auto industry is in high gear as new car and light truck sales are expected to reach 17.7 million units in 2016 on reduced gasoline prices and low interest rate on auto loans, as per the National Automobile Dealers Association’s (NADA) estimates.

Further, underlying demand trends in the housing space remain strong and homebuilding is expected to pick up pace, supported by an encouraging job picture, affordable interest/mortgage rates and an improving economy. The American Institute of Architects (AIA) expects healthy growth in non-residential construction spending this year based on strong demand for hotels, office space, manufacturing facilities and amusement and recreation spaces.

Steel Industry Showing Resilience

Strong fundamentals in automotive and construction will also favor the steel industry. U.S steel demand is projected to grow 3.2% this year. Even though the U.S. steel industry is continuously threatened by cheaper imports, imposition of anti-dumping duties will help homegrown steel makers to defend their turf against illegally dumped steel products. India will be a growth driver given its progressive construction and manufacturing sectors, rapid urbanization and structural reforms.

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What do the Numbers Say?

A preview of second-quarter earnings for the Basic Material sector reveals a projected decline of 16.4%, following a 15.9% year-over-year plunge in the first quarter. However, there is a silver lining with the sector expected to enter the positive territory in the back half of the year with 4.4% and 15.6% growth in the third and fourth quarters, respectively. (For a detailed look at the earnings outlook for this sector and others, please read our Zacks Investment Research

Written By: Zacks Investment Research