Basic materials are some of the most noticed and some of the most overlooked stocks at the same time. Companies in the basic materials sector are focused on providing the raw materials that keep the developed world, well, developed.
These companies mine the coal that you use to grill your steaks. They bring iron to the surface of the planet for use in the highrise buildings that grab your attention as you drive through a populous downtown area. They provide the oil used to fuel your energy and transportation needs and the gold, silver, and other precious metals you wear in your ears, around your neck, and on your fingers.
Basic materials companies essentially have a hand in just about every product you’ll ever consume. Considering this, it’s not shocking to learn that some basic materials companies are some of the largest companies in the world.
Of course, this means there are tremendous profits to be made in the sector, both for the companies within it and the investors that fund them.
7 Best Basic Materials Stocks to Buy
It’s important to keep in mind that not all basic materials companies are created equal, and not all stocks will generate gains. As with any other sector, when picking basic materials stocks to invest in, it’s important that you do your research and choose wisely. Here are what I believe to be seven of the strongest basic materials investments on the stock market today.
1. Rio Tinto (NYSE: RIO)
Rio Tinto, like the majority of stocks on this list, is an industrial metals and mining company. Founded in 1873, the company is one of the longest-lived and most successful iron ore, aluminum, copper, and molybdenum mining companies in the world.
Iron ore, aluminum, and copper aren’t the only ways the company makes money either. It is a mining powerhouse, providing the world with a consistent supply of salt, titanium dioxide, and a wide range of other basic materials important to the modern world.
There are plenty of mining companies that mine these raw materials. What makes Rio Tinto so special?
One of the most important factors here is cost. At the moment, Rio Tinto has one of the lowest operational costs in the mining industry. Low-cost operations mean there’s far more room for profits at the company than can be found at most other miners in the same space.
The company’s innovation has been a driving force behind its low-cost operation. Early investments in autonomous and electric vehicles and the automation of the majority of the mining process has kept costs low and will continue to do so for the long run. As a result, the company has an impressive balance sheet.
The company’s management team also has a history of showing its investors that they are appreciated. The dividend yield at the company is 10.26%, representing one of the best dividends in the basic materials sector and adding to the value of owning this stock.
Moreover, Rio Tinto has one of the lowest price-to-earnings (P/E) ratios in the industry, with investors paying less than seven times earnings per share (EPS) to own a share of the stock. Between the strong dividends paid and great valuation metrics, both income and value investors could benefit from owning shares.
At the same time, the company has recently started mining lithium, an important basic material used in batteries. The price of lithium has been climbing as consumers around the world adopt clean energy solutions and electric vehicles, making the company’s entrance into the space a major opportunity to expand revenues.
With a long history of dominance in the raw materials mining and industrial metals industries, low-cost operations leading to strong cash flow, and returning value to investors by way of dividends and share buybacks, Rio Tinto stock is one of the most stable dividend stocks on the market and a basic materials play that should not be ignored.
2. International Paper (NYSE: IP)
As its name suggests, International Paper is a U.S.-based paper products company that operates around the globe. However, the company is no one-trick pony. Not only does it earn revenue from the production and sale of paper, it also produces and sells pulp and packaging products.
Founded in 1898, the company has a long history of dominance in the paper products industry. Today, the company employs more than 49,000 people and generates revenue of more than $20.6 billion per year.
As with most companies in the basic materials sector, International Paper is a cyclical investment. With COVID-19 vaccines making their way to consumers and consumer spending reaching highs, the market is booming, making it the perfect time for cyclical investments.
Furthermore, like Rio Tinto, International paper has a strong history of returning value to its investors by way of dividends and share buybacks. The company has consistently increased its dividends over the past several consecutive years. The current dividend yield on the stock is 3.6%, making this a great income investment and yet another one of the best dividend-paying stocks on the stock market today.
With a strong history of dominance in the paper products and packaging industry and a proven willingness to consistently return value to investors by way of dividends and share buybacks, International Paper is one of the best stocks in the basic materials sector.
3. BHP Group (NYSE: BHP)
BHP Group is one of the largest commodity mining companies in the world. The company mines a long list of raw materials including iron ore, coal, nickel, copper, oil, and natural gas.
Founded in 1885, this is yet another legacy basic materials company that has earned its leadership position in its respective markets. Today, the company employs more than 80,000 people. It generated more than $42 billion in revenue in 2020, with expectations to generate more than $60 billion in 2021.
The company’s diversified portfolio is a major source of attraction for investors. The company produces six key basic materials that are used across a diverse group of markets from construction to health care to consumer electronics:
- Copper. Copper is used in electrical applications due to its ability to conduct. It is also commonly used in antimicrobial applications in home-goods products.
- Iron Ore. Iron ore is rock that contains metallic iron. It is the most basic form of iron, pulled directly from the earth. This is the same iron that, once smelted and refined, is used to build everything from high-rise buildings to vehicles.
- Nickel. Nickel is a metal that’s commonly used in the manufacturing of stainless steel and other construction materials. It also has applications in lithium ion batteries found in most rechargeable devices from cell phones to cars.
- Metallurgical Coal. Metallurgical coal is a form of coal that’s found deep in the earth’s crust. It is a key component in the production of iron and other construction materials.
- Petroleum. Petroleum is a liquid product containing natural gas, oil, and other hydrocarbons. Petroleum is extracted from the earth and used to make fuels, plastics, and more.
- Potash. Potash is the name for a group of potassium compounds that are commonly used in fertilizers.
This highly diversified portfolio of products gives BHP Group a unique advantage. When conditions aren’t positive for one or two of its products, gains in demand for the other products help to balance out the declines.
At the same time, BHP Group is another big dividend payer in the basic materials industry, currently offering a dividend yield of more than 11%.
As another legacy company in the basic materials space that doubles as a great dividend stock, BHP Group has a long history of providing growth and income for its investors while dominating within its fields of business, making the stock one to watch closely.
4. Ternium (NYSE: TX)
Founded in 2005, Ternium has had an incredibly fast run for the top. The company has quickly become one of the leading producers of flat-steel materials used in the construction sector, including prepainted, galvanized, galvalume, and bonderized building materials. Today, the company employs more than 20,000 people and generates more than $8.7 billion in annual revenue.
At the moment, economic concerns caused by the COVID-19 pandemic have led to the Federal Reserve moving forward with relaxed monetary policy. For the end consumer, this works out to low interest rates on loans, which has contributed to a sharp rise in the demand for real estate and construction materials in recent months, suggesting that the demand for Ternium products will rise.
Stock market analysts seem to love the stock as well. According to TipRanks, the average rating on the basic materials stock is a “moderate buy” with an average price target that suggests a potential upside of nearly 40%. Considering that the average annual return of the S&P 500 Index sits at around 9.8%, analysts suggest that an investment in Ternium stock would outpace the returns realized across the stock market.
Ternium is another leading dividend payer. The current dividend yield on the stock is 4.87%. At the same time, the company has increased its dividend consistently over the past several years, routinely returning value to its investors.
Although Ternium is no legacy company, it has already built a strong history of dominance in flattened-steel construction materials. The company has grown to generate billions of dollars in revenue and strong returns for investors by way of both growth and dividends. All in all, this stock is worth considering for your portfolio, both in the short term to take advantage of a boom in real estate and in the long term as a stable dividend stock.
5. LyondellBasell Industries (NYSE: LYB)
Founded in December 2007, LyondellBasell Industries has quickly become a behemoth in the basic materials sector. The company is focused on the development of chemicals commonly used in the manufacturing of construction materials, lightweight plastics, biofuels, and more.
As with many companies in the cyclical basic materials sector, the stock experienced significant declines at the onset of the COVID-19 pandemic. However, the stock has experienced a strong recovery since reaching lows in the depths of the pandemic-led sell-off.
There’s plenty of reason to be excited about LyondellBasell Industries. Since its inception in 2007, the company has grown to generate more than $27 billion in annual revenues and employ more than 19,000 people.
As with most other successful basic materials stocks, LyondellBasell Industries is also a great dividend stock. Currently, the stock trades with a dividend yield of about 4.68%, and has raised its dividend payments relatively consistently over the past several years.
The company has also become a major player in the renewables space — renewable fuels in particular. With the company’s chemicals being used in the development of most renewable fuels on the market today, it has become a cornerstone in a space that has seen quite an increase in interest as of late.
All in all, when it comes to the raw chemicals needed to produce lightweight plastics, construction materials, vehicle components, and renewable fuels, LyondellBasell industries is the go-to source. As a result of its strong positioning in the space, the company has built a compelling balance sheet, consistently paid dividends to its investors, and survived through the toughest part of the coronavirus pandemic. All in all, this basic materials stock is worth your attention.
6. Air Products & Chemicals (NYSE: APD)
As the world looks to renewables as a solution to the environmental concerns it’s facing, Air Products & Chemicals seems to be the right investment at the right time. The company is focused on the development of industrial gasses and fuels, but doing so in a way that’s good for the environment.
That model has led to massive growth for the company, which now employs more than 19,000 people and generates nearly $9 billion in annual revenue.
The company’s claim to fame is its proprietary gasification technology designed to convert abundant natural resources into synthetic gas (syngas) in a sustainable way. The syngas is then used in the development of fuels and industrial gasses used by members of various industries including refining, chemicals, metals, electronics, manufacturing, and food and beverage.
Moreover, the company is making waves in the hydrogen power industry after a recent collaboration with Baker Hughes surrounding advanced hydrogen compression and gas turbine technology.
However, there is one drawback to consider. The stock doesn’t make for a very strong value play, as it currently trades with a price-to-earnings ratio of around 29, well above the industry average of 15.
From an income perspective, the company pays dividends with a yield of just over 2%. Although that’s not turning any heads, it’s definitely a reliable source of income from your investments.
With President Biden in the White House and Democrats largely in control in Washington D.C., a strong push toward clean, renewable gasses and fuels is expected, which could lead to a significant increase in revenue and profitability ahead.
All told, Air Products & Chemicals is a strong play for those looking to capitalize off of the clean energy trend while generating income.
7. Freeport-McMoRan (NYSE: FCX)
Freeport-McMoRan may be the last on the list, but it’s definitely not the least worthy of being here. Founded in 1988, the company has become a massive player in the mining sector, with a specific focus on gold, copper, and molybdenum. Today, the company employs more than 24,000 people and generates more than $14 billion in annual revenue.
At the moment, there’s a strong argument that now’s the best time to jump on the stock as well.
As the COVID-19 recovery continues to take place and Federal Reserve monetary policy remains dovish, home sales and remodels are going through the roof, which creates quite a bit of demand for the company’s flagship product: copper.
Used in electrical wires and various other aspects of a home build, the price of copper has been on a tear upward lately. This has led to rising profitability and free cash flow for Freeport-McMoRan, both of which are great news for investors.
At the same time, growing demand for copper isn’t expected to slow any time in the near future. As a result, investors can look forward to continued gains in profitability and improvements in the company’s financial position.
As a result, investors have been piling in, pushing the stock up well over 37% year to date with no signs of the growth slowing down.
At the end of the day, Freeport-McMoRan isn’t going to be a strong pick for the value or income investor, but from a growth perspective, the stock is hard to ignore. Considering expectations of continued growth for the company, FCX is a stock that’s well worth paying close attention to.
The basic materials industry isn’t what many would consider to be sexy. It’s not an industry built in technology, there are few surprises, and the companies within the industry are little known to the average consumer.
Nonetheless, basic materials companies are not only important to the global economy, but many of them are overwhelmingly profitable and have the potential to generate tremendous gains for investors.
As is always the case, it’s important to keep in mind that no investment can be made without risk. It’s important to do your research when making any investment decision. Without research and an understanding of what you’re actually investing in, you’re gambling rather than investing.
Disclaimer: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.