Getting Organized - Basic Materials
It is time to get organized. The model portfolio is in good shape and I have 10+ decent ideas waiting in the wings. I want to see the LKQ investor day on September 10th, so let fill some time looking at each of the 11 market sectors.
Let’s start with the Basic Materials sector. This is one of my favorites because the companies tend to have wildly variable earnings. Two of my favorite stocks, Corteva and Royal Gold are technically part of this sector, but I think of them both as special situations. Nutrien - NTR - $46 is my favorite Basic Materials stock.
NTR is largest potash producer, the third largest nitrogen fertilizer producer, and the second largest phosphate fertilizer producer. NTR also has 2000+ stores as a retail distribution network.
I think NTR can show the ability to earn $10.00/share in mid-cycle earnings in the next 5 years. Let’s put a very conservative 10x multiple on those earnings and get a very rough target of $100 in 5 years. From the current stock price of $47 that is roughly a 17% compound annual return. And let’s not forget the dividend yield of 4.5%. In ballpark terms, let’s call that a 20%+ total return. I am not sure I want write that much about target prices, but let’s take a small step in that direction.
In very general terms, I am looking for stocks that can double over the next 5 years, and if I get paid a dividend yield while I wait, that is even better. NTR is a model stock. If you want to learn more, they just did a great investor day in June.
Basic materials are about 6% of most small cap value indices, so one stock is an average weighting. I like all the agricultural stocks, but you can only own so many. Many of the other materials stocks are near their highs. Groups like copper, cement, or packaging are just not cheap. I have decent ideas at the top of this list, but nothing real exciting. It will tough to unseat Nutrien. Maybe I could add one more materials stock and overweight the sector. One of my industrial stocks, Titan International, is also tied to agriculture. I think I will stick to just one Basic Materials stock.
Albemarle deserves some consideration. I want to learn more about rare earth minerals. Dow is a solid story with a 5% yield. Stepan needs more work. Materion is almost a tech stock. There is some work needed is this sector, but let’s not try too hard.
Mosaic - MOS - $28 - fertilizer, very cheap but NTR is better
FMC - FMC - $64 - pesticides, cheap but NTR is better
Scotts Miracle-Gro - SMG - $70 - still not understood by Wall Street
Stepan - SCL -$75 - surfactant turnaround story
MP Materials - MP - $12 - rare earth elements, I need to learn more
Ashland - ASH - $86 - neat turnaround story
Dow - DOW - $53 - 5% yield, maybe too tied to housing, good story
Albemarle - ALB - $87 - lithium is a tough call pre-election
Summit Materials - SUM - $39 - my favorite cement stock, well managed
Huntsman - HUN - $21 - kind of boring, but at the right price
Materion - MTRN - $113 - the only Beryllium miner, kind of a tech story
Nucor - NUE - $146 - the best steelmaker, a Trump stock
Compass Minerals - CMP - $9 - salt miner, pray for a bad winter
American Vanguard - AVD - $6 - small cap, pesticides have been weak
Kaiser Aluminum - KALU - $71 - debt too high, Barrow owns 5%, needs Boeing
Sensient - SXC - $74 - neat food ingredients maker
Sealed Air - SEE - $35 - technology is not what it once was
Air Products - APD - $274 - maybe the best hydrogen stock at the right price
Rio Tinto - RIO - $63 - big yield, but too tied to China
Greif - GEF - $62 - interesting packaging
Trimas - TRS - $24 - sleepy packaging
Core Molding - CMT - $18 - neat small cap
International Flavors - IFF - $100 - very slow turnaround
Alcoa - AA - $32 - too much China esposure
Ball - BALL - $64 - ok packaging company
Vulcan Materials - VMC - $248 - my favorite rock quarry
Newmont - NEM - $51 - my favorite big cap gold
Nova Gold - NG - $4 - my favorite small cap gold
Louisiana Pacific - LPX - $93 - lumber, maybe at $50, well run
Freeport McMoRan - FCX - copper, too much China exposure