From Todd Rosenbluth: CFRA’s Investment Policy Committee raised its weighting on the materials sector to overweight from marketweight last week. Sam Stovall, CFRA’s Chief Investment Strategist, noted that we project this mid-to-late economic cycle outperformer to record above-market EPS growth in 2017, assisted by a recovery in commodity prices from their drawn-out decline. He also thinks the group will benefit from the expected pickup in U.S. infrastructure spending under the new Republican administration. There are a variety of ways to gain exposure to the sector, leveraging CFRA’s stock and ETF research.
Christopher Muir, a CFRA equity analyst, has a positive fundamental outlook for the diversified chemicals sub-industry, the largest in the S&P 500 materials sector. Muir believes that the business environment for the chemical industry will remain healthy and that the chemical manufacturing sector will continue to expand. In addition, he notes that industry consolidation, between Dow Chemical (DOW 54 ****) and Dupont (DD 70 ****), will generate several billions of synergies.
CFRA is also positive on other materials sub-industries, following the recent US election. Equity analyst Matt Miller raised his fundamental outlook to positive on the steel industry in November in part due to Trump’s discussion in the campaign to significantly increasing tariffs on imported steel from China. Following the Trump victory, Miller thinks protective tariffs should remain for at least four years and be supportive of steel prices. CFRA anticipates greater steel demand due to a combination of modestly rising GDP and further increases in construction and infrastructure spending.
Meanwhile, CFRA’s fundamental outlook for the gold sub-industry was also raised to positive in November. Miller thinks a Trump presidency should increase demand for gold as a safe-haven investment. Trump’s surprise win raises uncertainty, could enhance market volatility, and we see heightened event risk. Longer-term, Miller also expects significant physical demand growth, driven by China and India; and supply growth struggling to keep up with demand.
Miller also has a positive fundamental outlook for the construction materials sub-industry, as he expects infrastructure spending in the public and private sectors to continue growing.
Muir, Miller and the CFRA team have buy or strong buy recommendations on 35 US materials stocks, including Barrick Gold (ABX 15 *****), Celanese (CE 76 *****), Martin Marietta Materials (MLM 217 *****) and Steel Dynamics (STLD 35 *****).
However, investors can also use ETFs to gain exposure to the sector. Year to date through November 25, the global materials sector gathered $11 billion of new money, the most of any sector according to SSGA.
Materials Select Sector SPDR (XLB 49 Overweight) is one such ETF, which represents the S&P 500’s materials stocks. Chemicals companies such as DD and DOW make up 71% of the ETF’s assets, with smaller stakes in metals & mining and containers & packaging companies. The ETF ranks favorably for our qualitative view on the value of its holdings, its technical trading patterns and low costs. Vanguard and iShares are among the other providers offering exposure to primarily large-cap materials stocks across multiple industries.
Investors seeking out more metals & mining exposure could look to SPDR S&P Metals & Mining (XME 32 Marketweight). More than half of the ETF’s assets are in steel companies such as AK Steel (AKS 9 ****), with gold and silver companies adding a combined 15% of assets. While the CFRA research reflects elevated risk considerations, the ETF’s bullish technical trends and low costs provide an offset.
For more significant gold exposure, VanEck Vector Gold Miners (GDX 21 NR) is worthy of attention even though we do not cover sufficient of its gold and silver equity holdings, such as Rangold Resources (GOLD 74 ****) from a valuation perspective to form an overall ranking. The ETF trades 92 million shares on a daily basis with a tight bid/ask spread.
CFRA’s ETF ranking on approximately 950 equity ETFs is based on a combination of holdings-level and ETF-level attributes. Rankings of overweight, marketweight and underweight on the ETFs are produced separately from the Investment Policy Committee view on a sector.
This article is brought to you courtesy of CFRA Research.