I feel deluged lately by webinars and events touting investments in gold and precious metals. One theory pushed to support investment in these industry groups is that 1974 is here again. They claim it is inevitable that the market will tank further as the economy plunges into stagflation, a deeper recession accompanied by huge inflation and problematic unemployment.
At the same time infrastructure building is still a government priority and unspent dollars have already been allocated for this process in the Build Back Better bill. Therefore, it is time to invest in industrial metals and other cyclical basic materials groups. Interestingly, all of these groups are generally covered by the same ETFs in a sector called either materials or basic materials depending upon which sector classification system is being used. This week we analyze the top three ETFs that cover the entire sector, not just a portion of it. Then we look inside the sector and highlight four of its most interesting stocks according to our models.
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The ETFs selected are:
XLB, Materials Select Sector SPDR ETF – tracks a market-cap-weighted index of US basic materials companies that includes only the materials components of the S&P 500. It is dominated by giant chemical companies including 6 of its top 10. 3 of the remaining 4 are metals companies including mining giants Newmont Corp. and Freeport McMoRan. The remaining company, Corteva (CTVA), provides agricultural products and is the only one in the top 10 rated 4 (Buy) by ValuEngine. It will be included in the stock analysis portion of this article.
FXM, First Trust Materials ALPHADEX ETF – tracks a tiered, equal-weighted index of large- and mid-cap basic materials firms in the US. Holdings are selected and weighted based on growth and value metrics. FXZ utilizes a quant-driven strategy to pick the ‘best’ basic materials firms in the US, using growth and value screeners. This minimalist approach, combined with a tiered equal-weighting scheme, leads to a concentrated portfolio that tilts away from large-caps and leans toward mid-caps. The result is major sector tilts, with elevated risk at times. Overall, FXZ offers a “smart beta” approach to the US basic materials space, instead of providing market-like sector exposure. The value tile is very evident by the fact that 8 of its top ten holdings are industrial metals companies.
PSCM, Invesco S&P Small Cap Materials ETF – tracks an index of US small-cap basic materials firms weighted by market cap. PCSM focuses exclusively on US small-cap basic materials companies. The fund pulls from the S&P SmallCap 600, a market-cap-weighted index that consists of US small-cap companies screened for size, liquidity, and financial viability. It specifically holds a concentrated portfolio of companies engaged in producing raw materials, including paper or wood products, mining and metals, chemicals, and construction materials. The top ten holdings are dominated by specialty chemical companies with a sprinkling of metal companies. Its top holding, Livent Corporation (LTHM) is also ValuEngine’s top-rated company in the sector (5=Strong Buy) with primary listing in the US and a market cap above $1 billion.
As usual, the S & P 500 benchmark ETF is included for comparison. Not so usual, given that PSCM selects its stocks from a small cap index, IWM (the iShares Russell 2000 ETF) representing the small cap universe is also included. All Data is as of Dec. 12, 2022.
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
| XLB | FXZ | PSCM | IWM | VOO | |
| ETF Names | Materials Select Sector SPDR | First Trust Materials AlphaDEX | Invesco S&P SmallCap Materials | iShares Russell 2000 | Vanguard S&P 500 |
| Weighted Avg Market Cap ($B) | 53.7 | 16.6 | 2.7 | 2.9 | 471.5 |
| VE Rating | 2 | 1 | 5 | 4 | 3 |
| VE Forecast 1 mo Rtn | -0.22% | -0.42% | +0.08% | -0.02% | -0.17 |
| VE Forecast 3 mo Rtn | +2.28% | +0.78% | +1.49% | +1.09% | +1.96% |
| VE Forecast 6 Mo Rtn | +5.95% | +3.64% | +2.59% | +2.55% | +5.25% |
| VE Forecast 1 yr Rtn | -2.68% | -5.10% | +0.92% | -0.17% | -2.00% |
| Last mo. Return | +6.45% | +7.74% | +1.73% | +2.28% | +5.13% |
| Last 3 mo. Return | +3.73% | -0.18% | +1.38% | -4.69% | -3.27% |
| Last 6 mo. Return | -3.88% | -11.56% | -2.53% | -2.70% | -2.05% |
| Historic 1 Yr Rtn | -7.73% | +4.66% | -2.85% | -19.00% | -15.68% |
| Historic 5 Yr Ann. Rtn | +6.58% | +8.46% | +5.33% | +3.97% | +8.62% |
| Volatility | 21.8% | 27.8% | 29.1% | 23.8% | 18.7% |
| Sharpe Ratio | 0.30 | 0.30 | 0.18 | 0.17 | 0.46 |
| Beta | 1.07 | 1.27 | 1.30 | 1.16 | 1.00 |
| # of Stocks | 29 | 38 | 32 | 1957 | 500 |
| Percent of stocks Undervalued by VE | 25% | 32% | 57% | 71% | 37% |
| P/B Ratio | 2.7 | 1.8 | 2.0 | 2.0 | 3.5 |
| P/E Ratio | 13.4 | 11.7 | 11.8 | 28.3 | 17.2 |
| P/S Ratio | 4.9 | 1.0 | 0.7 | 5.7 | 2.3 |
| Div. Yield | 2.1% | 1.5% | 0.8% | 1.3% | 1.7% |
| Largest Holding | Linde PLC
LIN 18.4% VE 3 |
Steel Dynamics
STLD 6.0% VE 2 |
Livent Corp.
LTHM 8.3% VE 5 |
Shockwave Medical
SWAV 0.4% VE 4 |
Apple Corp.
AAPL 7.1% VE 3 |
| Expense Ratio | 0.19% | 0.61% | 0.29% | 0.19% | 0.03% |
* ETF Undervaluation # is the percentage of undervalued stocks, not a comparison with all other ETFs in our universe
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
ANALYSIS
- All Materials ETFs are clearly not the same. Of the three compared here, the historical performance numbers, forecasts and supporting data are variegated in almost every category. On a forecasted basis, both extremes are covered. PSCM, Invesco S&P Small Cap Materials ETF gets our highest rating of 5 (Strong Buy) while FXZ, First Trust Materials AlphaDEX ETF is rated 1 (Strong Sell). Looking inside the two ETFs, our valuation model agrees with our forecasting model. 57% of PSCM’s holdings are considered overvalued as compared with 32% for FXZ.
- The largest basic materials sector ETF, XLB (Select Sector SPDRs Materials), also has by far the largest average market cap among its holdings. This is $54 Billion as compared with $17 Billion and $3 Billion. Rated 2 (Sell) by the forecast model, our valuation model also is skeptical about this ETF, rating 75% of its holdings as overvalued. Moreover, XLB is so concentrated that its top 5 holdings comprise about 45% of its weight.
- Although our models rate FXZ as a sell now, it had by far the best performance among the five ETFs for the past 12 months. It increased by 4.7% while the VOO was down close to 16%. It also had the best one-month performance in this research study.
- Perhaps one reason PSCM is rated a Strong Buy is that IWM, the Russell 2000 Small Cap ETF Benchmark is now rated 4 (Buy) despite having greatly underperformed S&P 500-benchmarked VOO during the prior five years. Our valuation model favors the stocks in IWM as a group over those in VOO as 71% are undervalued as compared with 37%.
Looking inside the Basic Materials sector at individual stocks, there are five stocks that I considered germane enough for a quick analytic review:
- Livent Corp (LTHM) – a manufacturer and seller of performance lithium compounds primarily used in lithium-based batteries, specialty polymers, and chemical synthesis applications; the stock is the largest holding in PSCM.
- Energy Fuels Corp. (UUUU) –engages in the extraction, recovery, exploration, and sale of conventional and in situ uranium recovery in the United States; UUUU is one of the smaller holdings in PSCM.
- Corteva Inc. (CTVA) – operates in the agriculture business. It operates through two segments, Seed and Crop Protection. The Seed segment develops and supplies advanced germplasm and traits that produce optimum yield for farms. The Crop Protection segment offers products that protect against weeds, insects and other pests, and diseases, as well as enhances crop health above and below ground through nitrogen management and seed-applied technologies. The stock is the fifth largest holding in XLB.
- Linde PLC (LIN) – is the largest Materials Sector company in the S&P 500 Index. It was created by the merger of Linde AG of Germany and Praxair Inc. in the US. The firm operates as an industrial gas and engineering company in North and South America, Europe, the Middle East, Africa, and the Asia Pacific. It offers atmospheric gases, including oxygen, nitrogen, argon, and rare gases; and process gases, such as carbon dioxide, helium, hydrogen, electronic gases, and acetylene. The company is based in Woking, UK. The stock is by far the largest component of XLB.
- Cleveland-Cliffs (CLF) – The company offers carbon steel products, stainless steel products; and electrical steel products. It also provides tubular components, including carbon steel, stainless steel, and electric resistance welded tubing Further, it owns five iron ore mines in Minnesota and Michigan. The company serves automotive, infrastructure and manufacturing, distributors and converters, and steel producers. It is presently the fifth largest component of FXZ.
Subscribers can view current ValuEngine data and findings on these stocks HERE
| LTHM | UUUU | CTVA | LIN | CLF | XLB | |
| Name | Livent Corp. | Energy Fuels Corp. | Corteva Inc. | Linde PLC | Cleveland- Cliffs, Inc. | Materials Select Sector SPDR |
| Market Cap. ($B) | 4.3 | 0.9 | 44.8 | 169.3 | 8.2 | 53.7 (Weighted Avg.) |
| VE Rating | 5 | 5 | 4 | 3 | 1 | 2 |
| VE Forecast 1-mo. Price Rtn | +1.30% | +1.14% | +0.52% | -0.16% | -0.84% | -0.22% |
| VE Forecast 3-mo. Price Rtn | +1.78% | +3.21% | +4.53% | +3.45% | -0.45% | +2.28% |
| VE Forecast 6-Mo. Price Rtn | +1.83% | +5.53% | +7.37% | +7.29% | -4.17% | +5.95% |
| VE Forecast 1-yr. Price Rtn | +15.81% | +13.79% | +6.21% | -1.89% | -10.16% | -2.68% |
| Last mo. Price Rtn | -21.94% | -15.49% | -6.13% | +3.12% | +2.18% | +6.45% |
| Last 3 mo. Price Rtn | -30.91% | -23.31% | -0.02% | +19.91% | -5.13% | +3.73% |
| Last 6 mo. Price Rtn | -14.20% | -8.82% | +11.38% | +13.65% | -12.24% | -3.88% |
| Historic 1-Yr. Price Rtn | -10.96% | -28.35% | +34.33% | +2.47% | -20.91% | -7.73% |
| Historic 5-Yr Ann. Price Rtn | +14.32% | +27.55% | +24.01% | +15.64% | +5.97% | +6.58% |
| Volatility | 64.9% | 67.7% | 24.5% | 22.3% | 64.8% | 21.8% |
| Sharpe Ratio | 0.22 | 0.41 | 0.98 | 0.70 | 0.29 | 0.30 |
| Beta | 1.84 | 1.52 | 0.73 | 0.88 | 0.90 | 1.07 |
| Under-
valuation Percentile |
72 | 45 | 33 | 26 | 10 | 25% |
| P/B Ratio | 3.2 | 3.6 | 1.8 | 4.4 | 1.3 | 2.7 |
| P/E Ratio | 18.7 | N/A | 24.5 | 28.6 | 4.3 | 13.4 |
| P/S Ratio | 6.0 | 66.3 | 2.6 | 5.0 | 0.4 | 4.9 |
| Div. Yield | 0% | 0% | 1.0% | 1.4% | 0% | 2.1% |
* ETF Undervaluation # is the percentage of undervalued stocks, not a comparison with all other ETFs in our universe
Subscribers can view current ValuEngine data and findings on these stocks HERE
Analysis
- Cleveland Cliffs gets the ValuEngine worst 1- ,3- , 6- month and 1-year forecasted returns of any of the 5 stocks in the study. Although its traditional fundamental valuation ratios are easily the best in this comparison, it is rated as highly overvalued by the ValuEngine valuation model which takes its -76% EPS growth rate into consideration as well. CLF is rated 1, a strong sell.
- The sector’s largest company by market capitalization, Linde plc (LIN) delivered standout price performance for its investors during the past six months and well above-average performance for the 12-month period. Our models indicate that it might have gotten a bit ahead of itself in valuation and now sees it performing in line with the market with a 3 (Hold) rating.
- Despite a robust 12-month return of more than 30%, ValuEngine expects CTVA’s superior performance to continue in 2023. Its rating is a 4 (Strong buy).
- Energy Fuels Corp. (UUUU), one of the smaller companies in the Russell 2000, is a feast-or-famine situation. It suffered a poor 2022 and its earnings are barely positive off a low base. It was a stellar 5-year performer, however, and is showing signs of a potentially robust turnaround. High potential upside here is coupled with huge volatility. The 5-rating (Strong Buy) should also be interpreted as speculative buy in this case.
- Livent (LTHM), the largest holding in the 5-rated PSCM ETF is also rated 5 (Strong Buy) for year-ahead performance. Livent is also considered quite undervalued by the ValuEngine valuation model. With solid earnings growth of nearly 40% and a strong Surprise ranking, Livent seems poised to recover from poor relative returns in 2022 during the year ahead.
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In summary, the basic materials sector runs the gamut with a number of Strong Buy and Strong Sell rated stocks and ETFs. Within the sector, most of the opportunities identified by our models are clustered in the small cap portion of the market. Overall, PSCM, the Invesco Small Cap Materials ETF diversifies the risks found in picking small cap stocks but still has tremendous upside. One stable midcap worth a long look is Corteva (CTVA). It has an excellent 5-year alpha and has very competitive valuation ratios accompanied by solid earnings projections.
By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc
www.ValuEngine.com
support@ValuEngine.com
All of the approximately 5,000 stocks, 16 sector groups, 140 industries, and 600 ETFs have been updated on www.ValuEngine.com
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