When most investors think about dynamic sectors, technology springs to mind first. After all, what's more impressive than a small-cap cybersecurity stock or cloud-computing startup that doubles your money in short order?
But lately technology hasn't quite been able to keep up with a select group of rather old-school stocks. Select materials companies, including oil and gas firms as well as metal and chemical companies, have been booming — and outperforming even big-name picks like Apple (AAPL) and Alphabet (GOOGL) (GOOG) in 2018.
Sure, some stocks have been under pressure — like Freeport-McMoRan (FCX), which has tumbled 12% in the last month after reporting poor earnings, or Arconic (ARNC), which imploded on fears of a trade war and is currently down over 30% so far this year.
When you look past the laggards, many materials stocks are outperforming the broader market. There are a number of reasons for this trend, including:
- An uptick in inflation, with raw material pricing hitting its highest levels since 2011.
- Tax cuts in the U.S. and a stronger global economy has led to robust growth and higher demand for raw materials. Specifically, the 2018 World Economic Outlook from the International Monetary Fund forecast 3.9% growth globally in both 2018 and 2019. Plus, the World Bank forecast a 20% increase in energy commodity prices vs. previous expectations of a 16% increase.
Here are five companies profiting in the "materials world" of 2018.
With year-to-date returns topping 30%, oil exploration and production company Hess Corp. (HES) is firing on all cylinders.
Hess is a leaner and more focused oil company that is largely dependent on pumping oil out of the ground. That business hasn't been without its challenges in recent years, with Hess stock regularly in the red due to low energy prices. But Hess shares have surged more than 60% from its lowest levels in more than a decade last summer, and momentum has kept going ever since.
The reasons for that is partially because of oil's rebound and the narrowing of Hess's losses as a result. But it's also because of specific operations in the Bakken shale area of North Dakota that represents a big chunk of its current production, and could see as much as a 50% increase in output after big investment in the region. That's in addition to going in with Exxon Mobil (XOM) on a massive project off the coast of Guyana that continues to uncover new oilfields for the pair to access.
Hess isn't without its risks as it burns cash, but favorable energy pricing and more rigs adds up to a strong outlook for this oil stock.
Oil is a big deal right now as crude prices remain high, but natural gas also has a lot to offer. After a brief dip in December, nat gas prices have stabilized — and SRC Energy (SRCI) is a great way to cash in on this trend.
Operating mainly in Colorado's fruitful DJ Basin, SRC Energy underwent some big management changes in 2015 and quickly made a series of big acquisitions — including purchasing assets in the DJ Basin from Noble Energy (NBL) late last year that increased its drilling locations by more than 50%.
The proof of this increased output is in SRC Energy's revenue growth projection of more than 70% for fiscal 2018, followed by nearly 30% on top of that in fiscal 2019. Earnings per share could also jump almost 70% this year and another 15% next year.
No wonder shares are up roughly 40% year-to-date as the benefit from that acquisition seems to be hitting the bottom line. And with the prospect of increased natural gas demand thanks to a potentially hot summer just around the corner, things could get even better for this stock.
If you want to look at an impressive stock chart, dial up Southern Copper (SCCO). Shares are more than 40% higher since their fall 2017 lows and up about 10% so far this year. The stock has recently been undergoing some consolidation, which means that now may be an excellent time to buy while the shares are at the lower end of their trading range.
The fact that this stock has climbed higher despite the threat of U.S. tariffs and even as copper prices moved lower in March is testament to its strength. In fact, a closer look at copper over the past few months shows a series of higher lows and higher highs — a bullish outlook for the metal.
That's because copper is the lifeblood of many industries, from wires and pipes to motors and roofing materials. When the global economy is looking up, so is demand for the "red metal." At the same time, disruptions at major competitors BHP Billiton (BHP) and Freeport-McMoRan reduced supply in 2017.
That dynamic adds up to a big win for Southern Copper. And with a nice dividend of about 2.3%, this definitely seems like a materials stock worth a look in 2018.
Oil prices make energy attractive
While talk of a trade war and inflation helped remind investors about old industrial names in the U.S., Brazilian steel and iron miner Gerdau (GGB) is worth a look if for no other reason than its performance; the stock is up almost 50% in the past year, and roughly 30% since Jan. 1.
Once again, modest inflation and a robust global economy is creating tailwinds. Moreover, Brazil's economy is showing promise after a rather ugly few years marked by the worst recession in the nation's history and widespread political corruption.
Brazil returned to growth in late 2017, and at the beginning of the year the nation's finance minister said the economy may be able to double the IMF's forecast of 1.5% growth in 2018 and post something north of 3% — perhaps topping the U.S. and other more developed nations.
Steel prices have risen steadily since 2016 lows, in part because the industry has pulled back on supply. Increased demand at home and abroad will likely support Gerdau shares, and domestic strength will offset any fallout from the U.S.-China trade battles.
When most investors consider the materials sector, they focus on energy and metals. But agricultural chemicals and fertilizers, including potash and phosphate, are a big business in 2018.
Stabilization in the fertilizer industry has resulted in better pricing and nearly constant increase in Mosaic's (MOS) stock price since September. Shares are up about 8% year-to-date and are nearing a new 52-week high — up about 35% from their September lows.
Analysts aren't expecting momentum to slow. Stifel Nicolaus has increased its price target on Mosaic to $32 from $28. HSBC put an even higher $35 target on the stock thanks to supply-demand dynamics, and RBC Capital just upgraded the stock to "outperform" after sales topped expectations in its early May earnings report.
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