July Basic Materials: Coal Tops By Yield But Cellulose, Carbon, Copper, And Chemicals Are Best By Brokers

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Includes: AHGP, ARLP, BA, BAK, BBL, CF, CINR, DDC, DRD, FBR, GE, INTC, JPM, KRO, MRK, NRP, NSU, PG, RIO, SXCP, UAN, UFS
by: Fredrik Arnold

Summary

Annual yields of ten Basic Materials leaders averaged 9.74% as equities charged bullishly after June as Dow dogs did too.

Yield from LIFZF, RIO, CINR, NRP, AHGP, CWXZF, ARLP, KRO, UAN, and SXCP ranged from 6.78% to 16.33% as of July 25 closing prices.

Analysts' 1-year targets pegged top ten upsides at 49.87% average with net gains 53.95% for ARLP, BBL, UFS, RIO, CF, NSU, BAK, KRO, DDC, FBR, with CWXZF and DRD losers.

Thirty Basic Materials firms averaged 15.8% upsides and 21.6% net gains. Top ten gain predictions ranged from 15.5% to 262.16%.

Top ten Basic Materials sector stocks by yield are forecast by analysts to gain 1.92% LESS from $5k invested in the lowest priced five than from $5k in all ten.

July Basic Materials SML Dogs

Yield (dividend/price) results from here verified by Yahoo Finance were calculated as of July 25, 2016 for Small, Mid, & Large cap Basic Materials sector stocks. Small cap firms were valued at $200M(illion) to $2B(illion); Mid cap firms were worth $2B to $10B; Large caps were valued above $10B. Those yield results led to the actionable conclusions discussed below.

Dividend Dogs Rule

The "dog" moniker was earned in three steps: (1) any stock paying a reliable, repeating dividend (2) whose price fell to a point where its yield (dividend/price) (3) grew higher than its peers (such as this Industrials collection), is so tagged. Thus, the highest yielding stocks in any collection became known as "dogs."

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Fifty Money Dogs

Since late 2011, this report series has applied dog dividend methodology to uncover possible buy opportunities in each of eight major market sectors listed by Yahoo Finance: basic materials (BasMats), consumer goods (ConGo), financials (Fins), healthcare (Heal), industrial goods (IndiGo), services (Svcs), technology (Tec), and utilities (Utes). In the past two years, the series expanded to report (1) dividend yield; (2) price upside; (3) net gain results based on analyst 1-year target projections.

The series was recently revised to report on 11 sectors as defined by Morningstar and tracked here: Basic Materials, Communication Services, Consumer Cyclical, Consumer Defensive, Energy, Financial Services, Healthcare, Industrials, Real Estate, Technology, and Utilities.

This article intended to reveal bargain stocks to buy and hold up to one year. See Dow 30 article for explanation of the term "dogs" for stocks reported based on Michael B. O'Higgins book "Beating The Dow" (HarperCollins, 1991), now named Dogs of the Dow. O'Higgins system works to find bargains in any collection of dividend paying stocks. Utilizing analyst price upside estimates expanded the stock universe to include popular growth equities, as desired.

Dog Metrics Followed Basic Materials Stocks by Yield

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Actionable Conclusion (1): Coal Boasts Top Yields As Agricultural Inputs, Specialty Chemicals, Building Materials, & Industrial Metal Dogs Trail

Coal, steel, industrial metals, & chemical industry firms sourced nine of the top ten basic materials sector stocks showing the biggest dividend yields for July, while a building material dog joined the chase.

Top yield dog was the coke coal stalwart, SunCoke Energy Partners (NYSE:SXCP) [1]. Three more coal firms placed fourth, sixth, and seventh: Alliance Resource (NASDAQ:ARLP) [4], Alliance Holdings (NASDAQ:AHGP) [6], and Natural Resource Partners (NYSE:NRP) [7].

Second place went to CVR Partners (NYSE:UAN) [2] mining agricultural inputs. Third place was occupied by Kronos Worldwide (NYSE:KRO) [3], the specialty chemicals firm listed as leader in May. A building materials supplier was fifth, CanWel Building Materials (OTC:CWXZF) [5].

Two industrial metals firms cracked the top ten this month in eight and ninth places, Ciner Resources (NYSE:CINR) [8], and Rio Tinto (NYSE:RIO) [9].

A steel making outfit placed tenth, Labrador Iron Ore Royalty (OTCPK:LIFZF) [10],to complete the top ten Basic Materials sector dogs by yield list as of July 25.

Basic Materials Top Ten Price vs. Dividend Results Matched Those Of The Dow Dogs

Relative strengths of the top ten Basic Materials sector dogs graphed below by yield were plotted as of market close 7/25/2016 and compared to those of the Dow. Projected annual dividend history from $10,000 invested as $1k in each of the ten highest yielding stocks and the total single share prices of those ten stocks created the data points shown in green for price and blue for dividend.

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Actionable Conclusions: (2) Basic Materials Top Ten Charged Bullishly, (3) Dow Dogs Too

Dividend from $10k invested as $1k in each of the basic materials top ten dogs fell after June, while the aggregate single share price of the top ten grew. Dividend dropped at a rate of 8.5% while total single share price jumped up 29%.

Dow dogs also charged bullishly after June. Projected annual dividend from $10k invested as $1K in each of the top ten dropped 1.73%. At the same time, aggregate single share price increased 3.2% to power that charge.

The Dow dogs overbought condition (in which aggregate single share price of the ten exceeded projected annual dividend again after June.

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Actionable Conclusion (4): Dow Dogs Expanded Their Overbought Status

The gap was $343 or 89% for August 2015. September brought some sanity back to the runaway Dow when the gap stood at $279 or 67%. October increases pushed the gap to $334 or 85%. November price over dividend gap went to $303 or 78%. As of December 4, the gap stood at $302 or 78%.

Come January 2016, prices of the ten Dow top dogs fell, and dividends rose, as Boeing (NYSE:BA) replaced General Electric (NYSE:GE) in the top ten to push the overbought gap down to $215 or 53%. February market moves put the gap at $208 or 48%.

March put the chasm at $293 or 73%. April saw the top ten to widen the gap to $394 or 102%. A May retreat was triggered by Intel (NASDAQ:INTC) and Merck (NYSE:MRK) returning to the top ten in place of JPMorgan Chase (NYSE:JPM) and Procter & Gamble (NYSE:PG). So, the overbought gap shrank to $357 or 93%. June expanded the distance between price over dividend back up to $408 or 112%, and July expanded the new 2016 record gap to $438 or 122%.

This gap between high share price and low dividend per $1k invested defines the Dow over-bought condition. Meaning, these are low risk and low opportunity Dow dog stocks. The Dow top ten July average price per dollar of annual dividend was $27.75.

Compared to the Dow dogs, the Energy top ten, while volatile, are far from overbought, maintaining their "normal" pattern of dividends above price.

In contrast to the Dow, Basic Materials Dog top ten average price per dollar of annual dividend came in at $11.19 as of July 25, that is almost 60% less than the price of an annual dollar of Dow dividends.

Wall Street Wizards Calculated Upside And Downside Dogs In May

One-year median target price set by brokerage analysts, multiplied by the number of shares in a $1k investment were used to compare ten stocks showing the highest upside price potential into 2016 out of 30 selected by yield. The number of analysts providing price estimates was noted after the name for each stock on the second chart below. Three to nine analysts were considered best for the most accurate mean target price estimate.

Actionable Conclusions: (4) Ten Basic Materials Sector Dividend Dogs Showed Upsides of 9.56% to 259.38% per Analyst 1-year Targets & (5) Six Revealed 1.84% To 18.26% Downsides

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Dog Metrics Selected Basic Materials Stocks By Yield

To quantify top dog rankings, analyst mean price target estimates provided a "market sentiment" gauge of upside potential. Added to the simple high yield "dog" metrics, analyst mean price target estimates are another tool to dig out bargains.

Actionable Conclusions: Wall St. Brokers Projected (6) Average 15.8% Upsides; (7) & 21.6% Net Gains from Top 30 Basic Materials Dogs By July 2017

Top thirty sector dogs graphed below show July 25, 2016 closing prices compared to those projected by analyst mean price target estimates to the same date in 2017.

A hypothetical $1000 investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter, the analyst mean target price was used to gauge the stock upsides to 2017.

Historic prices and actual dividends paid from $1000 invested in each of the thirty highest yielding stocks and the aggregate single share prices of those thirty stocks divided by 3 created the data points for 2016. Projections based on estimated increases in dividend amounts from $1000 invested in the thirty highest yielding stocks and aggregate one-year analyst target share prices from Yahoo Finance divided by 3 created the 2017 data points green for price and blue for dividends.

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Analysts as reported by Yahoo Finance projected a 5% lower dividend from $10K invested in this group, while aggregate single share price was projected to increase by 8% in the coming year (June to June).

Notice the dividend over price pattern of the vectors in the graph for the coming year. Analysts now predict Basic Materials dogs will NOT join the Dow dogs in an overbought situation as the graph showed in May.

The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the charts. Three to nine analysts was considered optimal for a valid projection estimate. Estimates provided by one analyst were not applied (n/a).

A beta (risk) ranking for each analyst rated stock was provided in the far right column on the above chart. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower than market movement. Higher than 1 showed greater than market movement. A negative beta number indicated the degree of a stocks movement opposite of market direction.

Actionable Conclusion (8): Analysts Alleged 10 Basic Materials Sector Dogs Could Net 15.6% to 262.16% By July 2017

Just three of ten top yielding Basic Materials sector dogs were verified as being among the top gainers for the coming year based on analyst 1-year target prices. So this month analysts graded the dog strategy as 30% accurate.

Ten probable profit generating trades were revealed by Thomson/First Call as reported in Yahoo Finance for 2017:

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Fibria Celulose (NYSE:FBR), the Brazilian pulp supplier to the world, was projected to net $2,621.61 based on dividends plus the lowest annual price estimates from one of nine analysts less broker fees. The Beta number showed this estimate subject to volatility 3% opposite the market as a whole.

Dominion Diamond (NYSE:DDC) was projected to net $777.75 based on estimated dividends plus mean target price estimate from eight analysts less broker fees. The Beta number showed this estimate subject to volatility 38% less than the market as a whole.

Nevsun Resources (NYSEMKT:NSU) was projected to net $399.80 based on a median target price estimate from six analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 19% less than the market as a whole.

Braskem (NYSE:BAK) was projected to net $390.35 based on the median of estimates from three analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 39% more than the market as a whole.

Kronos Worldwide was projected to net $313.33, based on dividend plus median target price estimates from four analysts less broker fees. The Beta number showed this estimate was subject to volatility 114% more than the market as a whole.

CF Industries Holdings (NYSE:CF) was projected to net $219.08.00 based on the median target price estimate from seventeen analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 3% less than the market as a whole.

BHP Billiton (NYSE:BBL) was projected to net $178.29 based on the low target price estimate from three analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 28% more than the market as a whole.

Domtar (NYSE:UFS) was projected to net $174.72 based on estimates from fourteen analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 65% more than the market as a whole.

Rio Tinto was projected to net $164.47 based on dividends plus the median target price estimate from four analysts less broker fees. The Beta number showed this estimate subject to volatility 29% more than the market as a whole.

Alliance Resource was projected to net $155.64, based on dividends plus a median target price estimate from three analysts less broker fees. The Beta number showed this estimate subject to volatility 29% less than the market as a whole.

Average net gain in dividend and price was estimated by analyst targets plus dividends less broker fees at 53.95%. The average Beta number showed these estimates subject to volatility 8% greater than the market as a whole.

Actionable Conclusion (9): (Bear Alert) Analysts Predicted Two Basic Materials Dogs To Show Net Losses of 6.8% & 14.93% By July 2017

Two probable losing trades revealed by Thomson/First Call in Yahoo Finance in 2017 were:

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CanWel Building Materials was projected to lose $68.70 based on dividend and a median target price estimate from five analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 36% less than the market as a whole.

DRDGOLD Ltd. (NYSE:DRD) was projected to lose $149.29 based on dividend and a median target price estimate from two analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 241% opposed to the market as a whole.

Average net loss was estimated by analyst target gains plus dividends less broker fees at 10.9%. The average Beta number showed these estimates subject to volatility 89% opposite the market as a whole.

Broker Projections For First and Last Basic Materials Dogs Look Contrary to Current Year-to-Date Price Histories

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Strong positive year-to-date price performance of DRD, the basic materials sector "big loser" red lined by analysts, is in mighty contrast to the marked negative annual price history for analyst-tagged upside leader, FBR. Momentum is not on the side of these two forecaster predictions.

Dog Metrics Uncovered 1.92% LESS Gain From Five Lowest Priced Highest Yield Basic Materials Sector Dogs

Ten small, mid, and large cap basic materials equities were culled by yield from 50 common stock choices from here. Yield (dividend/price) results verified by Yahoo Finance did the ranking.

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Actionable Conclusions: (10) Analysts Project 5 Lowest Priced of Ten Highest Yield To Fetch 9.18% VS. (11) 9.36% Net Gains From All Ten Basic Materials Dogs as of July 25, 2017

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$5000 invested as $1k in each of the five Lowest priced stocks in the top ten basic materials dividend kennel by yield were predicted by analyst 1 year targets to deliver 1.92% LESS net gain than $5,000 invested as $500 in each of the top ten. The very lowest priced basic materials dividend dog, Kronos Worldwide, was projected to deliver the best net gain of 31.33%.

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Lowest priced five basic materials dividend dogs for June 24 were: Kronos Worldwide, CanWel Building Materials, CVR Partners, SunCoke Energy Partners, Labrador Iron Ore Royalty (OTCPK:LIFZF), whose prices ranged from $5.70 to $14.76.

Higher priced five basic materials dividend dogs for June 24 were: Alliance Resource, Natural Resource Partners, Alliance Holdings, Rio Tinto, Ciner Resources whose prices ranged from $17.65 to $32.38.

This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. It mostly works here too. (Except this time, per analyst targets.)

The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. It's also the work analysts got paid big bucks to do.

A caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change. (See contrarian graph above).

Annual Analyst Accuracy

You see below the one year result of ten analyst target estimates for basic material stocks per Yahoo from this article of July 26, 2015. These were applied to the "basic method" Michael B. O'Higgins employed for beating the Dow. The key shows: losses in a reddish tint, poor results tinted yellow, gains tinted green, no tint means no difference.

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The "basic method" analyst accuracy score for top ten Basic Materials stocks by yield between July 26, 2015 and July 25, 2016 was ten losses. This group of nine-sector basic material dogs showed a 0% positive result since 2015. Aren't you glad the eleven sector standard now used for these articles not include energy with the basic materials equities?

Stocks listed above were suggested only as decent starting points for a small, mid, and large cap Basic Materials equities dog dividend stock investment research process in late-June, 2016. These were not recommendations.

See my instablog for specific instructions about how to best use the dividend dog data featured in this article.

Gains/declines as reported did not factor-in any tax problems resulting from dividend, profit, or return of capital distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

Three of these basic materials sector dividend pups are part of the now 49 Dogs of the Week (DOTW) found on The Dividend Dog Catcher premium site. You are invited to check it out. Click here to learn more or subscribe.

A top performing DOTW dog for the first quarter has been named. A second quarterly winner was discovered May 13. For a free copy of both quarterly reports and analysis of the winning Arnold Q1, Q2, plus Q3 August picks, when published, send your e-mail address, ticker symbol for your favorite dividend stock, and name of your favorite team of any sport or activity to: fredrika120@gmail.com. Remember: E-mail, ticker, team!

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from ycharts.com; dividend.com; finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance. Photo: barkingdogfitness.com.

Disclosure: I am/we are long GE, CSCO, INTC, PFE, VZ.

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.