After falling through most of 2015 and starting off badly this year, the materials sector has staged a comeback. The Materials Select Sector SPDR XLB gained 7.8% over February after a 10.7% fall in January. Fueled by a strong rally in oil prices and relatively encouraging economic data, stocks from the sector have been surging. Meanwhile, a variety of factors have helped gold to regain its sheen, making it the sector’s best choice.
These factors continue to power the broader markets and are likely to drive materials going forward. This is why investors with a growth-oriented approach can ignore the materials sector at their own peril. Given current market conditions, adding these stocks to your portfolio would make for a good option.
Encouraging Domestic Economic Data
Despite causing heartburn for investors since the start of the year, the state of the U.S. economy is not as bad as it seems. Personal consumption during January was the fastest experienced over the last eight months. Income moved up for the tenth consecutive time and by the highest since Jun 2015. Additionally, durable orders increased 4.9% in January to $237.5 billion, the biggest gains in the past 10 months.
Construction spending increased by 1.5% over last month to its highest level in nine years. The second estimate of fourth quarter GDP was revised upward to a gain of 1%. Further, the Atlanta Fed’s GDPNow real-time tracking estimate indicates that GDP for the current quarter will increase by 2.1%.
Oil Prices Recover
Encouraging comments from key oil producing nations pushed oil prices upward during the latter half of January. Oil prices staged a rebound during the third week after Iran’s oil minister indicated that Iran is ready to support Saudi Arabia and Russia’s move to hold crude production in line.
Oil cemented its gains during the fourth week following a positive outlook from the International Energy Agency (IEA) and encouraging comments from the OPEC secretary general. Data on the sector was also encouraging which provided the sector with a tailwind. Currently, oil prices have recovered more than 30% from the 13-year low they hit on Feb 11, leading to gains for the broader markets and materials stocks.
Gold Shines Once Again
Currently the best choice among materials stocks, gold experienced its strongest month of gains in four years during February. Continuing weakness in the global economy and sluggishness experienced on the domestic front have increased the attractiveness of the yellow metal as a safe haven. With year-to-date returns of nearly 16%, it is currently the most attractive safe haven asset. The demand for bullion has increased following the introduction of negative interest rates by several of the world’s central banks.
Meanwhile, supply constraints are likely to be felt as most producers were preparing for a scenario with low demand. Gold had traversed a rough patch over the past three years and touched a six-year low after the Fed opted for a rate hike last December. Production of gold is likely to decline by 3% in 2016, thus ending a seven-year stint of rising output. This demand supply mismatch is likely to push gold prices higher.
Our Choices
A variety of factors has ensured that materials stocks have emerged as an attractive option for investors once again. Positive economic data and resurgent oil prices are among the factors which have pushed the sector’s stocks to the forefront once again.
Materials stocks are likely to gain over the next few months as a result of these factors. This is why it makes sense to add these stocks to your portfolio. Our selection is also backed by a good Zacks Growth Score and Zacks Rank.
We narrowed down our choices with the help of our new style score system.
Our research shows that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the growth investing space.
AngloGold Ashanti Ltd. AU is a company involved in gold mining and exploration.
AngloGold holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘A’. The company has expected earnings growth of more than 100% for the current year. The earnings estimate for the current year has increased by 63.5% over the last 30 days.
Golden Star Resources, Ltd. GSS owns and operates gold mines in Ghana as well as other parts of the world.
Golden Star Resources holds a Zacks Rank #2 and has a Growth Style Score of ‘B.’ The company has expected earnings growth of 41.7% for the current year. The earnings estimate for the current year has increased by 39.1% over the last 30 days.
UR-Energy Inc. URG is a uranium exploration and development company.
UR-Energy holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘B.’ The company has expected earnings growth of more than 100% for the current year. The earnings estimate for the current year has increased by 66.7% over the last 30 days.
Sappi Ltd. SPPJY is a manufacturer and seller of paper and wood pulp as well as paper based solutions on a global scale.
Apart from a Zacks Rank #2, Sappi has a Growth Style Score of ‘A.’ The company has expected earnings growth of 83.9% for the current year. The earnings estimate for the current year has increased by 3.6% over the last 30 days.
Harmony Gold Mining Company Ltd. HMY conducts underground and surface gold mining.
Apart from a Zacks Rank #2, Harmony Gold Mining has a Growth Style Score of ‘A.’ The company has expected earnings growth of more than 100% for the current year. The earnings estimate for the current year has increased by 100% over the last 30 days.
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