What are we looking for?
U.S. materials stocks offering low valuations and strong dividend yields.
The current bull market has lifted many stocks, but the gains have not been even across all industry sectors.
Some sectors, such as health care and financial services, have been red-hot while others, such as materials and telecom services, have seen more muted gains.
According to Bloomberg, the U.S. materials sector has seen a 2-per-cent gain in the past three months – among the lowest of all sectors. With U.S. tax cuts expected and an infrastructure spending boom under way, might we expect outperformance in the materials sector in the near future?
The screen
We will be using Recognia Strategy Builder to identify U.S. materials stocks set to move higher based on low valuations.
We begin by setting a minimum market capitalization threshold of $2.5-billion (U.S.) to focus on the largest and most stable materials stocks in the market.
Next, we will employ two screening criteria to identify stocks that would be of interest to bargain-hunting investors.
Specifically, we will look for companies with forward price-to-earnings (P/E) ratios of less than 18 as well as price-to-sales ratios of 1.5 or less.
The materials sector currently has the lowest P/E ratio and the second-lowest price-to-sales ratio of all U.S. sectors.
Finally, because we wish to get paid to wait while our investments appreciate, we will also filter for companies offering a dividend yield of 1.5 per cent or greater.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions.
Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Topping our list is LyondellBasell Industries, a multinational chemical producer with both European and U.S. roots. The company is currently the third-largest independent producer of chemicals in the United States. The company is attractive based on its very low forward P/E ratio of 9.6 and dividend yield of 3.7 per cent (the highest on our list).
The lowest price-to-sales ratio on our list belongs to Texas-based Huntsman Corp., a producer of performance materials and plastics for a variety of other industries. The stock has been on a tear of late, up 55 per cent in the past six months and 18.6 per cent year-to-date.
The largest company on our list is Dow Chemical, with a market cap exceeding $77-billion. Over the past three months, Dow stock has gained 9.6 per cent. On Jan. 26, the company announced fourth-quarter results that beat analyst estimates by a healthy margin.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments.
Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.