Buying the shares of the companies that produce basic materials for the industrial economy has been a big gamble over the past year. It has been one of the best-performing companies in the past year as the demand for raw materials has soared.
Following this vigorous rebound from the COVID-19 recession, analysts believe there is more to be gained. The latest indication that this record rally has more scope came from Alcoa (NYSE :), the largest producer of aluminum in the US
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The company reported its first quarter this week exceeding analyst expectations. It also projected further gains as the economies reopen. Shares of Alcoa have surged since April and are up over 350%. They closed at $ 33.21 on Thursday.
Alcoa Weekly Chart.
"Alcoa expects a strong 2021 based on continued economic recovery and increasing demand for aluminum in all end markets," said the Pittsburgh-based company in its earnings review. The company's aluminum segment forecasts double-digit annual growth in sales of value-added products.
Alcoa Chief Executive Officer Roy Harvey said last month that China is taking meaningful steps to rein in production, calling it a "game-changer" for the industry after years of abundance.
Stocks in companies such as copper miner Freeport-McMoRan (NYSE 🙂 and Inc (NYSE 🙂 have surged on commodity price increases, driving the S&P 500 Materials Index up 73% over the past 12 months.
S&P 500 Materials Index Weekly Chart.
A boon to corporate profits
On the other hand, the strong demand for raw materials is driving higher costs for businesses, from home builders to garment makers. If history repeats itself, it will also be a boon to bottom line and investors, according to a recent report in the Wall Street Journal.
The report, quoting Advisors Asset Management's Scott Colyer, said commodity prices and, in turn, the price of manufactured goods have room to flow, thanks to fiscal and monetary stimulus from governments wanting the blow of pandemic lockdowns. soften and want to revive. their economies.
"Meanwhile, the scarcity of some materials and snarling supply lines are causing purchasing managers to stock up on the materials their companies need to do business, increasing demand," the report said.
The resurgence of the fortunes of these companies is, of course, highly dependent on the trajectory of the pandemic and how the major industrial economies emerge from this health crisis. Despite rising COVID cases worldwide, economists still believe the faster introduction of vaccines will help control the virus.
According to Bloomberg data, real GDP in the US will increase by 5.7% in 2021, compared to a decline of 3.5% in 2020. Likewise, China – one of the largest consumers of commodities – is expected to grow. real GDP will increase by 8.5% in 2021, compared to 2.3% last year. Canada's central bank plans to scale back its monetary stimulus on Wednesday as the economy is expected to recover strongly this year.
Analysts at Jefferies wrote in a note last month that their analysis shows that end-market demand continues to improve from a low last year, supporting their view that materials can remain the market leader until 2021 as their valuations are still being attractive.
"The main reason materials aren't getting more expensive in both big and small [stocks] despite strong performance, is that earnings expectations are really rising," they wrote in a note published by Bloomberg. Some of the best materials choices for Jeffereies are Freeport, Univar (NYSE :), and Linde (NYSE :).
Bottom Line
Buying shares of companies that produce raw materials for the industrial economy has been a profitable gamble for the past year. This increase in materials has more benefits as the global economy is expected to overcome the pandemic and accelerate GDP growth.
