Finding Value In The Lagging Materials Sector

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 |  Includes: NSU, TNH
by: Brad Kenagy

In this article, I will be searching for companies in the Materials sector, which has lagged the S&P 500 (NYSEARCA:SPY). I chose the materials sector because out of the nine major sectors of SPDR, the materials sector ETF (NYSEARCA:XLB) has lagged the S&P 500 by the most. So far this year, the S&P 500 has returned 16.62% whereas the XLB has returned 9.17%, which shows a significant outperformance by the SPY. I will be searching for companies that in addition to lagging the SPY have also lagged the XLB.

Goal #1: Select stocks that are Profitable

Goal #2: Select stocks with a dividend yield higher than the 10-year US Treasury rate.

Goal #3: Select stocks that are debt free.

Goal #4: Select stocks with the lowest beta.

To find stocks that meet all my goals, I will be using the TD Ameritrade stock screener. In addition to my goals, I will add additional criteria for company size and ROE.

Screener Criteria:

Sector: Materials

P/E Ratio: Greater than 1

Dividend Yield: Greater than 2%

Debt to Capital: Less than or equal to 0

Beta: Check boxes for < -0.2, -0.2 to 0.2, 0.2 to 0.8, 0.8 to 1.2

Market Capitalization: Greater than $500 Million

Return on Equity: Greater than 5%

Screen Results

After running the screen, I found that only two companies met my criteria, Terra Nitrogen Co. LP (NYSE:TNH) and Nevsun Resources Ltd. (NYSEMKT:NSU). In the table below are select statistics from the screen as well as the performance for each company compared to the materials sector, the S&P 500, and the industry for each company.

Terra Nitrogen

Perform. YTD

Mkt Cap

P/E

Dividend Yield

Beta

TNH

Terra Nitrogen Co. LP

4.71%

$4.2 B

13.33

7.31%

0.7

XLB

Materials Select Sector SPDR

9.17%

SOIL

Global X Fertilizers/Potash

-5.63%

SPY

SPDR S&P 500

16.62%

Click to enlarge

Nevsun Resources

Perform. YTD

Mkt Cap

P/E

Dividend Yield

Beta

NSU

Nevsun Resources Ltd

-18.46%

$695.6 M

6.11

2.87%

0.9

XLB

Materials Select Sector SPDR

9.17%

GDX

Market Vectors Gold Miners

-40.76%

SPY

SPDR S&P 500

16.62%

Click to enlarge

Thoughts & Observations

I think my screen results are very promising, and the two companies that made it through deserve a deeper look. Now looking at the data, I noticed that even though TNH and NSU both underperformed the materials sector as a whole, they significantly outperformed their corresponding industry ETFs. In addition both companies have no debt, therefore, the companies can use cash generated for reinvestment in growing the business, or returning cash to shareholders. Going forward if the market continues to rise, I believe these stocks could play catch-up and outperform from this point on, or if the market declines, having a lower beta, the stocks at least in theory should go down less than the market.

Disclaimer

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I do not own shares of TNH, but I am Long shares of RNF which is in the same industry.