Over the past year, the disparity in index sector weightings has widened. In the S&P 500 for instance, technology now accounts for over one quarter of the benchmark while four sectors (energy, materials, utilities, and real estate) each have less than a 3% weighting.
Materials stocks are one group that investors may want to keep on their radar. The sector outperformed in 2020 and is outpacing the broader market year-to-date. And the recent market rotation into cyclical names could keep the materials sector in a leadership position for some time.
He we highlight three global materials leaders that have enjoyed a nice run but are still worthy of being a core portfolio holding for benchmark aware and benchmark agnostic investors alike.
What is a Good Chemicals Stock?
PPG Industries (NYSE:PPG) is the world's second largest producer of paints and coatings serving a wide range of customers. It holds a top two position in every major market it competes including automobile manufacturing and aerospace. The Pittsburgh-based company is also well diversified geographically with roughly one third of revenue derived from North America, Europe, and emerging markets, respectively.
In the near term, growth is expected to coincide with the global economic recovery. This should lead to increased global demand for PPG's industrial and architectural coatings. Longer term, the company's exposure to above average growth markets like autos and aerospace stands to drive more of the same solid financial results we've been accustomed to seeing from PPG. More value-added acquisitions also hold the potential to add some growth.
PPG's track record of growth and balance sheet strength has enabled it to be one of the most shareholder friendly U.S. companies in any sector. It pays a dividend that has grown at an 8% clip over the last five years and a history of buying back its stock.
The valuation is roughly in line with the peer group average, but since PPG holds tops spots in several growth markets and has well above average fundamentals, it deserves to trade at a premium. Given the diversified growth exposure and rising dividend, investors may want to coat their portfolio with a position in PPG.
Are LyondellBasell Shares Undervalued?
Staying in the chemicals space, LyondellBasell Industries (NYSE:LYB) is another stock worth owning. The Dutch conglomerate is a jack-of-all trades in the materials world. It makes various polymers and chemicals, gasoline blending chemicals, and is a crude oil refiner.
Like with PPG, a rebound in the global automotive industry would be a helpful catalyst for LyondellBasell since it provides polyethylene, the most commonly used plastic in the world, and advanced polymer solutions to auto makers. This is particularly the case in Europe's where it is the leading supplier of polyethylene.
As car production ramps back up so too will demand for the company's automotive products. And as more cars return to the roads, LyondellBasell's gasoline derivatives and oil refining businesses should also get a much-needed boost.
LyondellBasell shares offer good value here at 23x the consensus earnings forecast for the next 12 months. The 3.9% forward dividend yield and history of share repurchases are also attractive. So, investors that believe the global economy is on a healthier path may want to hitch their wagon to this undervalued cyclical stock.
Is Rio Tinto a Good Mining Stock?
Moving over the mining industry, Rio Tinto Group (NYSE:RIO) also looks like a good buy here. The London-based miner specializes in iron ore, aluminum, and copper, in addition to diamonds and minerals.
It has been most recently associated with the departure of its former CEO who resigned in the wake of Rio Tinto's negative press stemming from its actions in the land down under. The company faced strong backlash for its role in destroying a pair of ancient aboriginal sites in Western Australia.
Although the scar from this misstep remains, with former CFO Jakob Stausholm now in the CEO role, Rio Tinto is in a good position to benefit from rising global demand for metals and more favorable commodity pricing.
With Rio Tinto, investors are effectively making a bet on iron ore. The metal, which is the main input for making steel, accounts for approximately three-fourths of the company's earnings. And although management expects only a modest increase in iron ore production in 2021 amid a still cautious industry environment, there may be bigger opportunities down the road.
While cars and trucks may come to mind when thinking about steel, there are other uses for the metal which could translate into growth for Rio Tinto. Steel is used to produce household durables like washing machines and dryers. It is also needed to construct buildings and bridges. Therefore, increased steel demand (and prices) can come from a continued rebound in consumer spending as well as heavy infrastructure spending that may come from the Biden administration and several other governments.
In terms of its financials, Rio Tinto has been making some effective moves. Cost reduction measures and the divesture of non-core asset have contributed to improved operating efficiency and created a more focused mining company.
At 11x forward earnings, the Rio Tinto ADR is one of the best bargains in the mining space. Despite the pandemic related challenges, it continued to reward investors with $5.57 in dividends last year including a special dividend of nearly $1. With growth prospects in autos, consumer durables, and infrastructure development ahead, investors may want to dig into their pockets and buy this mining stock.
Before you consider PPG Industries, you'll want to hear this.
MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and PPG Industries wasn't on the list.
While PPG Industries currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.
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