With the stock market having clawed back much of the fourth quarter sell-off, one metric that disturbs some is that many investors and especially quantitative strategy hedge funds have used the market strength to sell. Recent outflows have been cited as one huge reason for caution. With the first quarter almost over, it makes sense to look for stocks that have the ability to push higher and that may have lagged during the first part of 2019.
One area that definitely has lagged is materials, and Sean Darby, the innovative Chief Global Equity Strategist at Jefferies, recently turned positive on it and in a recent report noted this:
Although the materials sector has underperformed year-to-date, it is actually holding up a lot better given the perception that the US is moving into a late cycle, the US yield curve is flat and the greenback has been resilient. While the ISM manufacturing and some of the forward leading indicators have cooled, the sector’s resilience suggests that the global economy is still some way from moving into a recession. We turn modestly Bullish on materials.
Modestly bullish is hardly table-pounding, so Darby sticks with some of the top large capitalization materials stocks. Four are rated Buy at Jefferies, and they all look like solid plays for growth portfolios looking to add an allocation to the sector.
This blockbuster merger has emerged bigger and has been posting solid numbers recently. DowDuPont Inc. (NYSE: DWDP) is a diversified chemical company with $80 billion in sales in 2018, and it was formed as a result of the merger of Dow and DuPont in 2017.
The company is organized in three principal divisions — Agriculture (20% of EBITDA), Material Science (55%) and Specialty Products (25%) — which it intends to separate into three public entities by 2020.
The stock has underperformed this year, as concerns over trade issues with China continue to keep shares under pressure. The stock is down over 25% from highs seen in the fall of 2018.
Shareholders receive a 2.83% dividend. The Jefferies price target for the shares is $66, and the Wall Street consensus target is $66.91. The stock closed Tuesday at $53.68.
This company has rallied smartly off December lows but is still way below highs in the summer of 2018. Eastman Chemical Co. (NYSE: EMN) engages in the provision of specialty chemicals. It operates through the following segments.
The Additives and Functional Products segment includes chemicals for products in the transportation, consumables, building and construction, animal nutrition, crop protection, energy, personal and home care, and other markets. The Fiber segment offers cellulose acetate tow for use in filtration media, primarily cigarette filters.
The Advanced Materials segment of Eastman Chemical produces and markets its polymers, films and plastics with differentiated performance properties for value-added end uses in transportation, consumables, building and construction, durable goods, and health and wellness markets. The Chemical Intermediates segment consists of large scale and vertical integration from the cellulose and acetyl, olefins and alkylamines streams to support operating segments with advantaged cost positions.
Eastman Chemical investors receive a 3.00% dividend. Jefferies has a $91 price objective, in line with the $91.71 consensus estimate. Shares closed at $83.53 on Tuesday.
This company may be lesser known but holds solid upside potential as a sector leader. Linde PLC (NYSE: LIN) is the largest industrial gases company in the world, with sales of $30 billion following the merger of equals between Praxair and Linde. The two companies had already won a conditional green light for their tie-up back in October but had to continue operating as separate entities until the divestment of nine American business units were completed.
It produces and distributes atmospheric and process gases, high-performance surface coatings and engineering solutions. Linde products, services and technologies bring productivity and environmental benefits to a wide variety of industries, including aerospace, chemicals, food and beverage, electronics, energy, health care, manufacturing and metals. With joint annual revenues of $30 billion, some 80,000 employees and a market capitalization of $94 billion, the group overtakes France’s Air Liquide to become the industry’s global leader.
Shareholders receive a 2.08% dividend. The $190 Jefferies price target is well above the $176.40 consensus target. Shares closed at $168.44.
Martin Marietta Materials
This company posted slightly lighter fourth-quarter results but is a Wall Street favorite. Martin Marietta Materials Inc. (NYSE: MLM) is one of the largest U.S. supplier of aggregates, with operations across 27 states, Canada and the Bahamas. Its largest concentration is in Texas, comprising approximately a third of its exposure.
Unfavorable weather dampened fourth-quarter construction activity, with Texas experiencing its wettest October in history, and rains in other southeastern states hurting shipments and boosting costs. The company remains upbeat, not just on 2019 construction demand, but it also noted many states with its greatest exposure were well positioned for housing and public nonresidential construction growth.
Investors receive a 1.00% dividend. The Jefferies price objective is $232. The Wall Street figure is $209.71, and shares ended Tuesday at $194.01.
A settlement of trade issues and some growth in Europe could be huge for these top plays. While hardly exciting, as sector leaders they should provide a degree of stability for investors.