7 Materials Stocks Analysts Love the Most
The materials sector tends to shine in the early stages of economic expansion. Here's a list of the best materials stocks as we enter the second half of 2021, according to the pros.
Few areas of the market are as cyclical as the materials sector, which is why it might pay to look at analysts' favorite materials stocks as we head into the second half of 2021.
After all, shares in companies that make everything from copper to industrial gases to specialty chemicals really tend to shine in the early stages of an economic expansion. Rising demand from a wide range of industries often boosts materials providers' volumes, pricing power and revenue.
Although much of the sector has been grappling with higher costs for raw materials and shipping – a knock-on effect of pandemic-era supply-chain disruptions – it's been able to pass along some of that pressure to buyers. Witness the recent spikes in commodities prices and other inflation flash-points of the past few months.
Although rising raw material costs and other concerns have acted as something of a break on the S&P 500 materials sector as a whole – its performance essentially matches that of the S&P 500 for the year-to-date – a number of sector names have generated torrid returns.
To get a sense of which materials stocks look poised for even more second-half outperformance, we used S&P Global Market Intelligence to screen the S&P 500 materials sector for analysts' favorite names.
Here's how it works: S&P Global Market Intelligence surveys analysts' stock ratings and scores them on a five-point scale, where 1.0 equals Strong Buy and 5.0 means Strong Sell. Any score of 2.5 or lower means that analysts, on average, rate the stock a Buy. The closer the score gets to 1.0, the stronger the Strong Buy call.
After sussing out the top-scoring names, we then dove into analysts' research, fundamental factors and estimates.
The result?
This list of 7 materials stocks that analysts love the most. They all get consensus recommendations of Buy, with increasing levels of conviction.
Share prices are as of July 1. Data and analysts' recommendations are courtesy of S&P Global Market Intelligence, unless otherwise noted. Stocks are listed by strength of analysts' consensus recommendation, from weakest to strongest.
Freeport-McMoRan
- Market value: $54.4 billion
- Dividend yield: 0.8%
- Analysts' consensus recommendation: 1.94 (Buy)
You can't have a global economic recovery without copper, which is second-to-none when it comes to its ubiquity and utility in construction, manufacturing, technological applications, consumer goods … you name it.
So it should come as no surprise that analysts – and the market – are over the moon for Freeport-McMoRan (FCX, $37.09), one of the world's largest copper miners.
Shares in FCX are up a whopping 43% for the year-to-date through July 1, beating the S&P 500 by 28 percentage points. Any time a stock moves that far, that fast, valuation can become a concern, but the Street as a group says FCX still has more room to run.
Investors can thank an upbeat outlook for copper prices and FCX's top-notch management team for the overall bullishness on the name.
"We are maintaining our Buy rating on Freeport-McMoRan," writes Argus Research analyst David Coleman in a note to clients. "The company has strengthened its balance sheet through asset sales and should also benefit from rising metals prices. We view Freeport as a well-run company with a strong track record in its industry."
The bulk of the Street concurs with Coleman's views. Of the 18 analysts issuing opinions on FCX tracked by S&P Global Market Intelligence, seven rate shares at Strong Buy, five say Buy and six call them a Hold.
Thanks to easy year-over-year comparisons and a bright copper-price forecast, analysts expect the company to deliver average annual earnings-per-share (EPS) growth of more than 63% over the next three to five years.
Given that upbeat outlook, FCX is one of the best materials stocks to watch going forward.
Sealed Air
- Market value: $9.0 billion
- Dividend yield: 1.4%
- Analysts' consensus recommendation: 1.93 (Buy)
Sealed Air (SEE, $59.14) is another stock in the materials sector of the S&P 500 that is vastly outperforming the benchmark index on the back of the recovery trade.
Shares in the conglomerate best known for packaging materials such as Cryovac food packaging and Bubble Wrap are up 29% for the year-to-date through July 1. That compares with a rise of 15% for the S&P 500 over the same span.
A resurgence in industrial activity and global shipping – not to mention the reopening of restaurants, sports arenas and other public venues – should continue to drive increasing volume growth across a number of Sealed Air's segments.
We certainly saw evidence of that in the company's first-quarter results, notes CFRA Research analyst Matthew Miller (Buy).
"Protective volumes increased 13% year-over-year, with double-digit volume growth in all regions," Miller writes. "U.S. industrial demand recovery should accelerate throughout 2021 and provide a catalyst for stronger year-over-year EPS growth in the remaining three quarters."
The analyst adds that he remains "positive on the fundamental outlook for SEE, underscored by an accelerating sales growth rate and continued improvement in the structural operating system."
Of the 14 analysts issuing opinions on SEE tracked by S&P Global Market Intelligence, six call it a Strong Buy, three rate it at Buy and five have it at Hold. They forecast SEE to generate average annual EPS growth of 7.6% over the next three to five years.
International Flavors & Fragrances
- Market value: $37.2 billion
- Dividend yield: 2.1%
- Analysts' consensus recommendation: 1.90 (Buy)
International Flavors & Fragrances (IFF, $149.39), a specialty chemicals company that makes everything from food additives and colorings to ingredients used in perfumes, was one of the market's more heavily shorted stocks earlier this year.
But a year-to-date gain of more than 37% seems to have put an end to that. At one point in February, roughly 28% of IFF's shares outstanding were sold short – meaning a large group of traders were betting that it's price would fall. (Short interest greater than 10% is considered high.)
How much of IFF's robust gains this year were driven by bearish traders unwinding those bad bets is unknown. Whatever transpired, the shorts have mostly given up.
At the most recent count, the stock's short interest stood at less than 3%. And given the Street's favorable view of IFF's prospects, that's probably just as well.
The consensus recommendation among analysts stands at Buy, with fairly high conviction. Ten of them call IFF a Strong Buy, three say Buy and six have it at Hold. One analyst slaps a Sell call on the name.
Analysts at Stifel are on the sidelines at the moment, citing valuation concerns after IFF's torrid first-half returns. Their longer term outlook, however, remains bullish.
"International Flavors & Fragrances is one of the 'Big Four' players in the growing, high barrier to entry global flavors and fragrances (F&F) market, in which the top four competitors hold approximately 60% market share," writes Stifel analyst Mark Astrachan. "We believe valuation below European peers limits downside for IFF shares from current levels, but we also view earnings visibility as limited and therefore remain at a Hold rating."
Analysts forecast IFF to deliver average annual EPS growth of more than 7% over the next three to five years, per S&P Global Market Intelligence.
DuPont
- Market value: $41.8 billion
- Dividend yield: 1.6%
- Analysts' consensus recommendation: 1.86 (Buy)
Speaking of IFF, DuPont's (DD, $78.60) recent sale of a key business to the flavors and fragrances firm is helping some analysts make the bull case for DD stock.
"Despite unevenness in some geographic markets due to the pandemic, DuPont continues to generate above-average earnings," writes Argus Research analyst Bill Selesky (Buy). "We also believe that DuPont’s recent sale of its Nutrition & Biosciences division to International Flavors & Fragrances will reduce leverage and streamline the company’s portfolio."
In addition to the IFF deal reducing DD's debt load and helping make it more efficient, Selesky says it should help free the chemicals giant to buy back stock and make bolt-on acquisitions.
CFRA Research echoes that view, and applauds DD's wisdom in freeing itself of its nutrition and biosciences operations.
"We believe a more nimble DD, which includes the N&B separation and continued deleveraging, will be well positioned for multiyear top- and bottom-line growth through pursuit of strategic organic and inorganic growth initiatives in markets with strong secular trends," writes CFRA's Richard Wolfe (Buy).
Expectations for a more "nimble" DuPont are already showing up in the Street's long-term growth (LTG) forecast. Analysts project the former component of the Dow Jones Industrial Average to generate average annual EPS growth of 10.7% over the next three to five years.
That sort of double-digit LTG forecast makes the valuation – DD trades at 17.9 times 2022 earnings estimates – appear pretty darn reasonable. It also helps explain why, of the 21 analysts issuing opinions on the materials stock, 10 call it a Strong Buy, four say Buy and seven rate it at Hold.
Eastman Chemical
- Market value: $15.9 billion
- Dividend yield: 2.4%
- Analysts' consensus recommendation: 1.78 (Buy)
The global cyclical recovery in specialty chemicals is part of the bull case on Eastman Chemical (EMN, $116.92). But analysts also like the fact that the company is divesting underperforming businesses, freeing up capital that can be used on targeted acquisitions and share buybacks.
To that end, most recently EMN inked an $800 million deal to sell its global tire additives business to private equity firm One Rock Capital Partners.
The infusion of cash – along with aggressive cost management – also allows the company to focus on innovative new businesses and other "portfolio-enhancing investments," in the words of Stifel analyst Vincent Anderson (Buy).
"We believe Eastman represents an attractive long-term investment in a high quality, integrated, and diversified chemical company that we expect will reward investors via continued innovation-driven growth, including recent progress on advantaged plastic recycling technology and prudent capital deployment," Anderson writes in a note to clients.
Anderson isn't the only one who thinks EMN is one of the best materials stocks around. Of the 18 analysts issuing opinions on Eastman Chemical tracked by S&P Global Market Intelligence, nine rate it at Strong Buy, four say Buy and five call it a Hold. They expect the company to generate average annual EPS growth of 13.7% over the next three to five years.
EMN stock gained 16.6% for the year-to-date through July 1, beating the broader market by about 2 percentage points, but analysts say it has more room to run. Their average target price of $138 gives shares implied upside of about 18% over the next year or so.
"The chemical maker is benefiting from its innovation-driven growth model, operational execution and cost-management actions," write analysts at Zacks Equity Research. "We are positive on the company’s prospects as it looks promising and is poised to carry the momentum ahead."
FMC Corp.
- Market value: $14.0 billion
- Dividend yield: 1.8%
- Analysts' consensus recommendation: 1.67 (Buy)
FMC Corp. (FMC, $108.54) stock is off to a rough start in 2021, losing almost 6% for the year-to-date through July 1. That lags the S&P 500 by about 21 percentage points.
Higher costs for raw materials and shipping have been a headwind for FMC, which makes fertilizers and agricultural chemicals. But some rising costs have already begun to abate, and the company has been able to offset some pain with price hikes, analysts say.
Furthermore, share-price weakness has given FMC a more attractive valuation than some of the other materials stocks on this list just as demand for its products is expected to pick up.
"We stay bullish on FMC's ability to generate solid earnings growth in 2021 given strong global agriculture fundamentals, supporting higher volumes through the rest of the year," writes CFRA Research analyst Richard Wolfe, who rates the stock at Strong Buy. "We believe this, coupled with price increases realized in the second half of 2021, will more than offset higher raw material and supply chain costs."
Over at Susquehanna Financial Group, analysts rate the stock at Buy thanks to its LTG potential. Analyst Sandy Klugman cites FMC's "industry-leading margin profile," as well its "ability to meet its long-term growth targets by successfully commercializing products out of its award winning R&D pipeline."
The Street's consensus recommendation stands at Buy, with high conviction. Of the 18 analysts issuing opinions tracked by S&P Global Market Intelligence, 10 rate FMC at Strong Buy, four say Buy and four call it a Hold.
Linde
- Market value: $151.2 billion
- Dividend yield: 1.5%
- Analysts' consensus recommendation: 1.67 (Buy)
Long-term dividend growth investors are probably familiar with Linde (LIN, $290.84). At least they should be. After all, it's a member of the S&P 500 Dividend Aristocrats, an elite group of companies that have raised their payouts annually for at least 25 consecutive years.
Linde joined the list of stalwart dividend-growth stocks in late 2018 after it completed its merger with Praxair. The $90 billion tie-up of Linde and Praxair created the world's largest industrial gases company.
As much as analysts like its storied and reliable dividend history, what really makes them bullish on LIN these days is fast-rising demand from a wide range of customers – and the pricing power that comes with it.
"Linde's higher first-quarter earnings largely reflected stronger pricing and higher volumes, led by healthcare, electronics and a recovery in the cyclical end markets of manufacturing, metals, chemicals and refining," writes Argus Research analyst Bill Selesky (Buy). "In the second half of 2021, we expect Linde to benefit from significant merger synergies and increased demand for industrial gases."
Still, Linde could be one of the best materials stocks beyond the second half. It benefits from having a strong presence in defensive end markets, the analyst adds, including healthcare, food, beverages and electronics.
"It also has a broad geographic presence and a substantial $3.5 billion backlog of projects, mostly under contract with blue-chip companies," Selesky writes.
The bulk of the Street shares Argus Research's bullish view, giving LIN a consensus recommendation of Buy. With 13 Strong Buy calls, six Buys and five Hold ratings, it's a high-conviction Buy call, to boot.
