Basic materials are some of the most noticed and some of the most overlooked stocks at the same time. Companies in the basic materials sector are focused on providing the commodities that keep the developed world, well, developed.
These companies mine the coal that you use to grill your steaks. They bring iron to the surface of the planet for use in the highrise buildings that grab your attention as you drive through a populous downtown area. They provide the oil used to fuel your energy and transportation needs and the gold, silver, and other precious metals you wear in your ears, around your neck, and on your fingers.
Basic materials companies essentially have a hand in just about every product you will ever consume. Considering this, it’s not shocking to learn that some basic materials companies are some of the largest companies in the world.
Of course, this means there are tremendous profits to be made in the basic materials sector, both for the companies within it and the investors that fund them.
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It’s important to keep in mind that not all basic materials companies are created equal, and not all stocks will generate gains. As with any other sector, when picking basic materials stocks to invest in, it’s important that you do your research and choose wisely. Here are what I believe to be five of the strongest basic materials investments on the stock market today.
Rio Tinto, like the majority of stocks on this list, is an industrial metals and mining company. Founded in 1873, the company is one of the longest-lived and most successful iron ore, aluminum, and copper mining companies in the world.
Iron ore, aluminum, and copper aren’t the only ways the company makes money either. It is a mining powerhouse, providing the world with a consistent supply of salt, titanium dioxide, and a wide range of other basic materials important to the modern world.
There are plenty of mining companies that mine these raw materials. What makes Rio Tinto so special?
One of the most important factors here is cost. At the moment, Rio Tinto has one of the lowest operational costs in the mining industry. Low-cost operations mean there’s far more room for profits at Rio Tinto than can be found at most other miners in the same space.
The company’s innovation has been a driving force behind its low-cost operation. Early investments in autonomous vehicles and the automation of the majority of the mining process has kept costs low and will continue to do so for the long run. As a result, the company has an impressive balance sheet.
Rio Tinto also has a history of showing its investors that they are appreciated. The dividend yield at the company is 5.23%, representing one of the best dividends in the basic materials sector and adding to the value of owning this stock.
Moreover, Rio Tinto has one of the lowest price-to-earnings (P/E) ratios in the industry, with investors paying less than seven times earnings to own a share of the basic materials stock.
With a long history of dominance in the raw materials mining and industrial metals industries, low-cost operations, and returning value to investors by way of dividends and share buybacks, Rio Tinto stock is one of the most stable dividend stocks on the market and a basic materials play that should not be ignored.
As its name suggests, International Paper is a U.S.-based paper products company that operates around the globe. However, the company is no one-trick pony. Not only does it earn revenue from the production and sale of paper, but it also produces and sells pulp and packaging products.
Founded in 1898, the company has a long history of dominance in the paper products industry. Today, the company employs more than 50,000 people and generates revenue of more than $20 billion per year.
As with most companies in the basic materials sector, International Paper is a cyclical investment. There’s a strong argument that, with COVID-19 vaccine and treatment options on the horizon, economic development will start to head in the right direction as the pandemic comes to an end, suggesting that now is the time to invest.
At the same time, International Paper seems to be incredibly undervalued compared to its peers. The average P/E ratio across the basic materials sector is about 15. International Paper trades with a price-to-earnings ratio of about 10. This screams that there’s plenty of room for this stock to grow ahead.
Furthermore, like Rio Tinto, International paper has a strong history of returning value to its investors by way of dividends and share buybacks. The company has consistently increased its dividends over the past several consecutive years. The current dividend yield on the stock is 5.66%, making this a great income investment and yet another one of the best dividend stocks on the stock market today.
With a strong history of dominance in the paper products and packaging industry, a price-to-earnings ratio that suggests an extreme undervaluation, and a proven willingness to consistently return value to investors by way of dividends and share buybacks, International Paper is one of the best stocks in the basic materials sector.
BHP Group is one of the largest commodity mining companies in the world. The company mines a long list of raw materials including iron ore, coal, nickel, copper, oil, and natural gas. Founded in 1885, this is yet another legacy basic materials company that has earned its leadership position in its respective markets. Today, the company employs more than 72,000 people and generates well more than $40 billion in annual revenue.
The company’s diversified portfolio is a major source of attraction for investors. The company produces six key basic materials that are used across a diverse group of markets from construction to health care to consumer electronics:
This highly diversified portfolio of products gives BHP Group a unique advantage. When conditions aren’t positive for one or two of its products, gains in demand for the other products help to balance out the declines.
At the same time, BHP Group is another big dividend payer in the basic materials industry. It is currently offering a dividend yield of 4.26%.
As another legacy company in the basic materials space that doubles as a great dividend stock, BHP Group has a long history of providing growth and income for its investors while dominating within its fields of business, making the stock one to watch closely.
Pro tip: If you’re going to add basic materials stocks to your portfolio, make sure you choose the best possible companies. Stock screeners can help you narrow down the choices to companies that meet your requirements. Learn more about our favorite stock screeners.
Founded in 2005, Ternium has had an incredibly fast run for the top. The company has quickly become one of the leading producers of flat-steel construction materials, ranging from prepainted to galvanized, galvalume, and bonderized building materials. Today, the company employs more than 20,000 people and generates nearly $10 billion in annual revenue.
At the moment, economic concerns caused by the COVID-19 pandemic have led to the Federal Reserve moving forward with relaxed monetary policy. For the end consumer, this works out to low interest rates on loans, which has contributed to a sharp rise in the demand for real estate and construction materials in recent months, suggesting that the demand for Ternium products will rise.
Stock market analysts seem to love the stock as well. According to TipRanks, the average rating on the basic materials stock is a “moderate buy” with an average price target that suggests a potential upside of more than 14%. Considering that the average annual return of the S&P 500 Index sits at around 9.8%, analysts suggest that an investment in Ternium stock would outpace the returns realized across the stock market.
Ternium is another leader among dividend stocks. The current dividend yield on the stock is 5.77%. At the same time, the company has increased its dividend consistently over the past several years, routinely returning value to its investors.
Although Ternium is no legacy company, it has already built a strong history of dominance in flattened-steel construction materials. The company has grown to generate billions of dollars in revenue and strong returns for investors by way of both growth and dividends. All in all, this stock is worth considering for your portfolio.
Founded in December 2007, LyondellBasell Industries has quickly become a behemoth in the basic materials sector. LyondellBasell is a chemical company that produces chemicals commonly used in the manufacturing of construction materials, lightweight plastics, biofuels, and more.
As with many companies in the cyclical basic materials sector, LyondellBasell Industries stock experienced significant declines at the onset of the COVID-19 pandemic. However, the stock has experienced a strong recovery since reaching lows back in mid-March.
There’s plenty of reason to be excited about LyondellBasell Industries. Since its inception in 2007, the company has grown to generate more than $30 billion in annual revenues and employ more than 19,000 people.
As with most other successful basic materials stocks, LyondellBasell Industries is also a great dividend stock. Currently, the stock trades with a dividend yield of about 5.5%, and has raised its dividend payments relatively consistently over the past several years.
The company has also become a major player in the renewables space — renewable fuels in particular. With LyondellBasell Industries’ chemicals being used in the development of most renewable fuels on the market today, it has become a cornerstone in a space that has seen quite an increase in interest as of late.
All in all, when it comes to the raw chemicals needed to produce lightweight plastics, construction materials, vehicle components, and renewable fuels, LyondellBasell industries is the go-to source. As a result of its strong positioning in the space, the company has built a compelling balance sheet, consistently paid dividends to its investors, and survived through the toughest part of the coronavirus pandemic. All in all, this basic materials stock is worth your attention.
The basic materials industry isn’t what many would consider to be sexy. It’s not an industry built in technology, there are few surprises, and the companies within the industry are little known to the average consumer.
Nonetheless, basic materials companies are not only important to the global economy, but many of them are overwhelmingly profitable and have the potential to generate tremendous gains for investors.
As is always the case, it’s important to keep in mind that no investment can be made without risk. It’s important to do your research when making any investment decision. Without research and an understanding of what you’re actually investing in, you’re gambling rather than investing.
Do you invest in basic materials stocks? What are your favorite companies in this space?