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Materials stocks are essential to the metabolism of society because this sector is responsible for producing the raw materials used by all other sectors of the stock market.
The Trump administration’s policies skew the pitch in favor of domestic producers so this class of stocks has sparked interest among most investors. You can diversify your portfolio and add to your financial growth by trading these 5 select basic materials stocks that could outperform their earnings estimate.
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Overview: Basic Materials Stocks
Basic materials stocks represent companies dealing with the discovery, development and processing of raw materials. This includes companies that make or process construction materials, chemicals, paper, glass, packaging products and forest products as well as minerals, metals and mining companies.
All stocks across this sector are very sensitive to the world economy. The sector tends to perform strongly at the beginning of an economic recovery. The companies may also weaken as the business cycle makes a transition from sharp recovery to stable expansion. Cyclical in its movements, investors often ignore this sector because it’s small or not ideal for their investing style. Basic materials make up the smallest sector exposure in the S&P 500’s 11 industrial segments — it weighs just over 2%.
For most commodities, the supply of basic materials is in geographical areas of marginal economic development and political uncertainty. As a result, the harvesting of natural resources like metals, coal and timber lends the sector greater exposure to 3rd world countries.
Best Online Brokers for Basic Materials Stocks
To start trading basic materials stocks, you’ll need to open a brokerage account with a discount or full-service broker. An online broker can help you identify the best stocks in the basic materials sector as well as provide the platform and tools to trade. Any of the online brokers on this list can help you on your investment journey.
Intermediate Traders and Investors
Features to Look for in Basic Materials Stocks
- Earnings growth is an important screening criterion when choosing a company to invest in. When you own stock, you take part in the growth of the underlying company, as measured by the earnings per share (EPS) growth. The earnings growth can be measured over various time frames, like year-over-year or a 5-year average. Filter out stocks with negative or declining earnings growth. A positive EPS indicates profitability.
- Debt-equity ratio primarily measures a company’s financial strength. It’s the percentage of a company’s total capitalization owed to others versus the shareholders’ equity. A lower debt-equity ratio is better. As a reasonable rule of thumb, consider companies that have a debt-equity ratio less than 50%.
- The position in the economic cycle also affects the demand for basic materials. Basic materials stocks suffer when the economy weakens and thrive when market conditions are on the upswing. Choose your entry point wisely.
Trade Basic Materials Stocks
The basic materials sector has been susceptible to changes in the global economy. Even as revenue and earnings drop, it’s difficult to resist buying top stocks when prices plummet. Investing in the materials sector might seem like a bad idea at the moment, but an economic rebound triggers demand, the 5 stocks we highlighted will see a boom. Basic materials is a cyclical sector — be sure to do your homework before putting your money there. Don’t risk it all until there’s more clarity to the economy.
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