The materials sector includes companies engaged in the discovery, development, and processing of raw materials, which are used across a broad range of sectors and industries. Materials stocks include manufacturers of products as varied as plastic, fertilizer, paper, concrete, and metals. Prominent names include Ecolab Inc. (ECL), Air Products and Chemicals Inc. (APD), and DuPont de Nemours Inc. (DD).

Many commodities including metals soared following Russia’s invasion of Ukraine in February 2022, with selected materials stocks seeing big gains. However, ongoing inflation and interest rate hikes coupled with looming concerns about a recession have prompted some commodities prices to fall in recent weeks. The possibility of additional rate hikes in late September has likely caused some additional skittishness among commodities investors as well.

Materials stocks, represented by the S&P 500 Basic Materials Index, have slightly underperformed the broader market. The index’s total return was -14.9% over the past 12 months, below the benchmark Russell 1000’s total return of -12.0%. These market performance numbers and all statistics in the tables below are as of Sept. 20, 2022.

Here are the top three materials stocks with the best value, the fastest growth, and the most momentum.

These are the materials stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows that you’re paying less for each dollar of profit generated.

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• United States Steel Corp.: United States Steel is a manufacturer of steel products. It sells primarily flat-rolled and tubular products in North America and Europe.
• Cleveland-Cliffs Inc.: Cleveland-Cliffs is a major North American flat-rolled steel producer and supplier of iron ore pellets. The company also supplies stainless steel tubing and other products. The company announced on Sept. 9 that it had reached a tentative agreement with the United Steelworkers for a new 47-month labor contract covering its Mining and Pelletizing operations. The contract is effective Oct. 1 and covers roughly 2,000 employees in Minnesota and Michigan.
• Steel Dynamics Inc.: Steel Dynamics is a carbon-steel producer and metals recycler. The company sells flat-rolled steel sheet, structural beams, steel bars, and other products.

These are the top materials stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly year-over-year (YOY) percentage revenue growth and most recent quarterly YOY earnings-per-share (EPS) growth. Both sales and earnings are critical factors in the success of a company. Therefore, ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one figure or the other unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of more than 2,500% were excluded as outliers.

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• CF Industries Holdings Inc.: CF Industries Holdings is a major manufacturer of nitrogen and phosphate fertilizer products worldwide. It sells nitrogen-related products including ammonia, urea, urea ammonium nitrate solution, and ammonium nitrate. In late August, subsidiary CF Fertilisers UK, announced that it would temporarily halt ammonia production at its Billingham Complex due to market conditions, including soaring natural gas prices. The business plans to import ammonia to continue to run its ammonium nitrate and nitric acid upgrade plants. The company said it had not yet decided on the exact date of the shutdown or reopening..
• MP Materials Corp.: MP Materials produces rare earth materials such as lanthanum, cerium oxides, and carbonates. The company operates mining and processing facilities in California.
• The Mosaic Co.: The Mosaic Co. is a major global producer and marketer of concentrated phosphate and potash, which are key nutrients for crops. The company has customers in 40 countries. Net earnings attributable to the company more than doubled as revenue also nearly doubled year-over-year (YOY). Potash operating earnings surged more than 18-fold YOY, helping to drive results.

These are the materials stocks that had the highest total return over the past 12 months.

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• CF Industries Holdings Inc.: See above for company description.
• The Mosaic Co.: See above for company description.
• Corteva Inc.: Corteva provides seed and crop protection services and products. Its offerings include germplasm and traits for use in farms around the world, as well as products to protect against weeds, insects, and disease. Corteva issued its earnings release for Q2 2022 on Aug. 4. Net income declined marginally YOY. Net sales climbed by 11.1% YOY, driven by demand for new Crop Protection products and strong early demand in Latin America.

Advantages of Investing in Materials Stocks

Core Demand: Materials companies provide products, such as metal, concrete, and chemicals, that are the foundation of the global economy. As the world recovers from the COVID-19 pandemic, governments are investing significantly in infrastructure and construction to stimulate economic growth, resulting in demand for a wide range of materials. Moreover, consumers are spending pent-up savings on building and remodeling homes, which has led to a rush on materials like lumber, steel, and cement. For instance, at the height of the pandemic, the iShares Global Timber & Forestry ETF (WOOD) that tracks lumber companies more than doubled amid surging demand for timber.

Portfolio Hedge: Materials companies that mine for precious metals, such as gold and silver, provide investors with a partial hedge against cyclical holdings in their portfolio, often outperforming during market downturns. Conversely, cyclical materials stocks like oil and gas producers that are more closely tied to the economy’s health typically outperform during periods of economic expansion. 2022 is an outlier year, however, with energy outperforming other sectors year to date (YTD) on the back of Russia’s invasion of Ukraine and increasing travel demand after the pandemic.

Risks of Investing in Materials Stocks

Rising Costs: Materials companies face periods of rising costs that can crimp earnings, especially if they coincide with falling commodity prices. Mining and developing resources is capital intensive. Supply chain disruptions, rising fuel costs, and machinery maintenance can cause significant challenges, particularly during periods of spiking inflation. For example, pandemic-related shipping snarls in 2021 saw the benchmark price to ship copper in the U.S. reach its highest level since 2003.

Industrial Action: Certain industries within the material sector, such as mining, are heavily unionized, increasing the risk of industrial action that can temporarily suspend or reduce operations. A reduction in output has the potential to impact a mining company’s earnings which can put downward pressure on its share price. In 2021, iron-ore mining giant Rio Tinto Group (RIO) had to reduce one of its mines to 25% capacity for several months due to strike action, which union officials claimed cost the company around $5 million daily.

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