Basic Materials Sector Defined
The basic materials sector collects and supplies many of the building blocks needed to make the things we use every day. This makes it a crucial industry for investors to be aware of. Basic materials sector stocks can include a wide variety of companies, like manufacturing and mining:
- Construction materials
- Chemicals and plastics
- Metals and minerals
- Paper, forest products, and packaging products
Demand for materials in this sector is extremely sensitive to conditions in the economy. When economic conditions weaken, demand for these products, and their pricing, tends to decrease, which in turn reduces the profitability and stock prices of basic material companies. Such market conditions arose in early 2020 as the COVID-19 outbreak slowed economic growth, targeting the basic materials sector heavily.
This industry is also highly competitive, which may impact profitability and return on investments, even during strong market conditions. For example, back in 2010 through 2019, the Dow Jones Basic Materials Index only achieved a 2% gain, meanwhile, the S&P 500 index rose over 190%. Because of these uncertain outcomes, investors need to be mindful when picking basic materials stocks.
Top basic materials stocks
With these factors in mind, here are some top basic materials stocks to consider:
BHP Group(ASX: BHP) located in Australia, BHP is the world’s largest mining company based on market capitalization, with operations valued at a whopping $180 billion to date. In other words, that makes it just about the size of oil giant Chevron Corp. (CVX) or Big Pharma Eli Lilly & Co. (LLY). There is a big measure of stability that comes with a footprint like that, particularly as BHP is incorporated across many mining businesses including copper, iron, and coal as well as fossil fuel manufacturing. Founded back in 1851, the company and its stock have a prosperous history of success and a standing record of generous dividends paid twice annually.
Compass Minerals International(NYSE: CMP) One of the smallest and most defined stocks on this list, Compass Minerals is a chemicals company that primarily focuses on agricultural chemicals including sodium chloride and magnesium chloride for industrial use. Those last two product names are a fancy way to say rock salt. Investors may not think of salt mines when thinking about the materials sector, although these salt crystals are crucial in a variety of products and applications ranging from agricultural, water treatment, and even for de-icing roadways. For $2 billion, CMP is not as established as other companies on this list – but despite this, it is the biggest fish in a small pond, and its niche dominance gives it a measure of reliability within the materials sector and offers consistent dividends payouts of $0.72 quarterly.
Top basic materials stocks prioritize durability
The global economy tends to flow in cycles, causing fluctuations in the supply and demand for materials. It experienced its latest downturn in early 2020 as the COVID-19 pandemic slowed the economy to a halt, temporarily reducing demand for basic materials. That downtrend served as an important reminder that businesses operating in this sector must maintain low costs and strong balance sheets to get through these tough economic times. Subsequently, it greatly helps to be able to produce a diverse portfolio of products, since that grows a company’s ability to withstand the highs and lows of the global economy.