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 commodities 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 and silver 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 will 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.
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5 Best Basic Materials Stocks to Buy in 2020
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 five of the strongest basic materials investments on the market today.
1. Rio Tinto (RIO)
Rio Tinto, like the majority of stocks on this list, is a metals and mining company. Founded in 1873, the company is one of the longest-lived and most successful iron ore, aluminum, and copper 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 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 Rio Tinto 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 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.
Rio Tinto also has a history of showing its investors that they are appreciated. The dividend yield at the company is 5.08%, representing one of the best dividends in the basic materials sector and adding to the value of owning this stock.
With a long history of dominance in its space, low-cost operations, and returning value to investors by way of dividends and share buybacks, Rio Tinto is a stock that should not be ignored.
2. International Paper (IP)
As its name suggests, International Paper is a U.S.-based paper 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, but 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 50,000 people and generates revenue of more than $20 billion per year.
As with most companies in the basic materials sector, International Paper is a cyclical investment. There’s a strong argument that, with COVID-19 vaccine and treatment options on the horizon, economic development will start to head in the right direction, suggesting that now is the time to invest.
At the same time, International Paper seems to be incredibly undervalued compared to its peers. The average price-to-earnings ratio across the basic materials sector is about 15. International Paper trades with a price-to-earnings ratio of about 10. This screams that there’s plenty of room for this stock to grow ahead.
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 5.66%, making this a great income investment.
With a strong history of dominance in the paper and packaging industry, a price-to-earnings ratio that suggests an extreme undervaluation, and a proven willingness to consistently return value to investors by way of dividends and share buybacks, International Paper is a stock that you should not overlook.
3. BHP Group (BHP)
BHP Group is one of the largest commodity mining companies in the world. The company mines a long list of commodities including iron ore, coal, nickel, copper, oil, and more. 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 72,000 people and generates well more than $40 billion in annual revenue.
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:
- 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. 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.
- Petroleum. Petroleum is a liquid product containing 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 5.2%.
As another legacy company in the basic materials space, BHP 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.
Pro tip: If you’re going to add basic materials stocks to your portfolio, make sure you choose the best possible companies. Stock screeners can help you narrow down the choices to companies that meet your requirements. Learn more about our favorite stock screeners.
4. Ternium (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 construction materials, ranging from prepainted to galvanized, galvalume, and bonderized building materials. Today, the company employs more than 20,000 people and generates nearly $10 billion in annual revenue.
At the moment, economic concerns caused by COVID-19 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 new home construction in recent months, suggesting that the demand for Ternium products will rise.
Analysts seem to love the stock as well. According to TipRanks, the average rating on the stock is a “moderate buy” with an average price target that suggests a potential upside of more than 14%. Considering that the average annual return of the S&P 500 sits at around 9.8%, analysts suggest that an investment in Ternium stock would outpace the returns realized across the market.
Ternium is another big dividend payer too. The current dividend yield on the stock is 5.3%. 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 products. 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.
5. Northern Dynasty Minerals (NAK)
Northern Dynasty Minerals is by far the riskiest play on this list. The company is far from profitable and hasn’t yet broken ground on its flagship mine. Nonetheless, it is an interesting binary play that could yield tremendous returns if all goes well or could be a bust, making it an interesting potential pick for investors with a heavy appetite for risk.
The claim to fame at Northern Dynasty Minerals is a potential mine known as the Pebble Project. The Pebble Project is believed to be one of the world’s largest deposits of gold, copper, silver, and several other precious and industrial minerals. Should this be the case, and the mine come to fruition, it will be one of the largest and most valuable mines in the world.
On the other hand, the company has spent more than $1 billion and a decade fighting to bring the mine to fruition. To date, ground has not broken at the Pebble Project.
The problem is that the deposit sits in an environmentally delicate area within Alaska that is highly protected by the United States Environmental Protection Agency (EPA). For years, Northern Dynasty Minerals waged a legal battle with the EPA, as the agency wouldn’t allow the company to even submit permit applications for the mine.
After a years-long court battle, the EPA and Northern Dynasty Minerals settled out of court. The settlement said Northern Dynasty Minerals would need to receive a positive review from the Army Corps of Engineers and the president’s administration would have to sign off before permitting could happen — but at least a clear path was laid out.
Recently, the Army Corps of Engineers weighed in on the project, and their opinion was positive. The Corps suggested that the mine would have little to no effect on the surrounding environment, including delicate fisheries. Moreover, the Environmental Impact Statement from the Corps pointed to economic benefits the mine would create for the struggling region.
Now, Northern Dynasty Minerals needs the Trump administration to sign off on the mine in order to move forward with production. Recently, a Politico report suggested that the Trump administration would block the permitting of the mine. However, doing so would go against the message Trump has been campaigning with during the election year.
There’s a strong chance that the Trump administration will follow the advice of the Army Corps of Engineers and approve the Pebble Project. Should this take place, the stock could fly.
However, it’s important to remember the binary nature of the investment. While an approval from the Trump administration could lead to significant gains, a rejection could result in serious declines. So, this is not an investment for the faint of heart.
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, these companies are not only important to the modern 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.
Do you invest in basic materials stocks? What are your favorite companies in this space?