This may seem like an odd time to be looking at materials stocks. After all, these are stocks that tend to perform well when the economy is booming. But not so well when businesses are dealing with rising interest rates to offset 40-year high inflation.
But this isn’t a typical economy. There are a lot of sectors that are essential to building the new economy.
I’m referring to things like 5G, autonomous vehicles (not to mention electric vehicles themselves) and renewable energy to name a few. The rapid growth in these sectors was snarled by supply chain disruptions. But the demand is still strong.
And that means that, as is the case with many sectors, there may be some attractive buys in the materials sector. This article looks at three materials stocks that offer some attractive fundamentals that should put them on your watchlist as you consider your next moves in this market.
A Leader in Two of the Most Sought-After Raw Materials
The first of the three stocks to consider is Vale (NYSE:VALE). The company is the world’s largest producer of two iron and nickel. These are two indispensable materials in the new economy. In fact, in May 2022, Vale announced a long-term contract with Tesla (NASDAQ:TSLA) to supply nickel for the company’s electric batteries.
And the company generates approximately 65% of its revenue from iron which is needed to make the steel that is being used for building items that will be critical to the nation’s infrastructure like wind turbines. Plus, the company has a strong relationship with China and is expecting the country to have strong demand in the second half of the year.
VALE stock is trading at an attractive price-to-earnings ratio of 3.03. The sector average P/E is around 8.5x earnings, Vale is trading at a nice discount. And the company offers a semi-annual dividend with a juicy yield of 6.22%. That’s also above the sector average.
An Undervalued Steel Company
Next on the list is Cleveland-Cliffs (NYSE:CLF). And I’ll start with the fundamentals. Like Vale, Cleveland-Cliffs is trading at an attractive P/E ratio of 2.61. When ratios start getting that low, you have to wonder what’s up, particularly with the stock price cut in half from its 52-week high.
The culprit may be inflation which is hurting the company’s earnings even as it continues to grow the top line on both a sequential and year-over-year basis. Still with a P/E ratio around 2, there’s not much risk to diving into CLF stock. Analysts tracked by MarketBeat give the stock a $27.92 price target which is a 60% upside from the current price.
Cleveland-Cliffs is “the largest supplier of steel to the automotive industry in North America.” And the company also recently reached a tentative 4-year deal with the United Steelworkers (USW) union that should add more certainty to the company’s earnings. With demand likely to remain strong, there appears to be a strong upside for the Cleveland-based company.
A Miner with a Stable Growth Story
The last of the three materials stocks for your watchlist is Freeport-McMoran (NYSE:FCX). The company has a growth stability score of 96 from S&P Capital IQ’s Growth Stability metric. The company has benefited from higher commodity prices.
But as Kate Stalter noted for MarketBeat readers earlier this month, those prices have been a double-edged sword. Lower copper prices in the last quarter contributed to lower revenue and earnings. However, Freeport-McMoran derives a sizable portion of its business from gold and molybdenum – of which it is the world’s largest producer.
And this a company that is trading at a P/E ratio of 8.8x which is in-line with the sector average with a strong track record of growth and a solid balance sheet.