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The Basic Materials sector has been a laggard this year, the total return, year to date (9/17/2012), was only 10.29%, while the appreciation of the Russell 3000 index in the same period was 16.2%. Nevertheless, it is possible to find promising candidates among the stocks in this sector.

Stock Sectors' Total Returns, Year to Date, are shown in the table below (Data through 9/17/2012):

Sector Name

Total Returns ( % )

Technology

27.15

Consumer Cyclical

24.88

Real Estate

23.47

Financial Services

21.56

Healthcare

20.2

Consumer Defensive

15.71

Communication Services

14.72

Industrials

13.27

Basic Materials

10.29

Energy

8.53

Utilities

4.99

Source: Morningstar, Inc.

In looking for future Basic Materials stock winners, I search for companies with positive growth prospects. The stocks I look for have to show stable financial conditions and generate significant free cash flow. However, in order to find the proper moment for an opening position, a technical analysis with a momentum indicator can be of great assistance for investors.

I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.

The screen's formula requires all stocks to comply with all following demands:

  1. The stock is included in the Russell 3000 index. Russell Investment explanation: "The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected."
  2. The PEG ratio is less than 1.4.
  3. Price to free cash flow is less than 17, (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).
  4. Debt to equity is less than 0.4.
  5. 10-day moving average is over 20-day moving average, and the cross happened 5 days or less prior to the start of the screen (short term momentum indicator).

I used Portfolio123's powerful free screener to perform the search. After running this screen on September 18, 2012, I obtained as results the 4 following stocks:

Agrium Inc. (AGU)

Agrium has low debt (total debt to equity is 0.34) and its price to free cash flow for the trailing 12 months is only 11.86. The forward annual dividend yield is 0.97%. The company explained that the impact of the severe drought in the U.S. has resulted in very strong grain and oilseed prices. It expects high crop prices and tight grain inventories to create significant support for international nutrient demand in the coming year, as growers globally are expected to expand acreage and optimize application rates. All these factors make the stock quite attractive.

Business description from Yahoo Finance (see here):

Agrium Inc. engages in the retail of agricultural products and services worldwide. The company operates in three segments: Retail, Wholesale, and Advanced Technologies. The Retail segment supplies crop nutrients, including dry and liquid nitrogen, phosphate, potash, sulfur, and micronutrients; crop protection products, such as herbicide, fungicide, and insecticide products; seed products; merchandise products comprising wool, fencing, feed supplements, animal health products, and other products, such as irrigation equipment. Agrium Inc. was founded in 1931 and is headquartered in Calgary, Canada.

Chart: finviz.com

Buckeye Technologies Inc. (BKI)

Buckeye Technologies has no debt at all and its price to free cash flow for the trailing 12 months is 16.98. The forward annual dividend yield is 0.99%. Among the 6 analysts covering the stock, 3 rate it a strong buy and 3 rate it buy. The company repurchased 750,000 shares ($22 million) during the fourth quarter and fiscal year 2012, bringing total year repurchases to 1.2 million shares ($33 million), or 3% of outstanding shares at the beginning of the year. BKI stock seems to be a good investment right now.

Business description from Yahoo Finance (see here):

Buckeye Technologies Inc. engages in the manufacture and distribution of cellulose-based specialty products. It operates in two segments, Specialty Fibers and Nonwoven Materials. The Specialty Fibers segment offers chemical cellulose, customized fibers, and fluff pulp derived from wood and cotton cellulose materials using wetlaid technology. The Nonwovens Materials segment provides airlaid nonwoven materials derived from wood pulps, synthetic fibers, and other materials using airlaid technology. The company was founded in 1992 and is headquartered in Memphis, Tennessee.

Chart: finviz.com

CF Industries Holdings, Inc. (CF)

CF Industries has low debt (total debt to equity is 0.32) and its price to free cash flow for the trailing 12 months is low only 7.66. The PEG ratio is also low only 0.78. The average annual earnings growth for the next 5 years (per annum) is 10.7%. The forward annual dividend yield is 0.73%. During the second quarter of 2012, the company repurchased 3.1 million shares for $500 million. The company's outlook is for high 2013 corn planting expectations, strong global demand, tight domestic nitrogen supply and favorable natural gas costs provide a positive operating environment for the remainder of 2012 and into 2013. CF stock seems to be a good investment right now.

Business description from Yahoo Finance (see here):

CF Industries Holdings, Inc., through its subsidiary, CF Industries, Inc., manufactures and distributes nitrogen and phosphate fertilizer products, serving agricultural and industrial customers worldwide. It operates in two segments, Nitrogen and Phosphate. The Nitrogen segment principally offers ammonia, granular urea, urea ammonium nitrate solution, urea liquor, diesel exhaust fluid, and aqua ammonia. The company was founded in 1946 and is headquartered in Deerfield, Illinois.

Chart: finviz.com

Schnitzer Steel Industries Inc. (SCHN)

Schnitzer Steel has low debt (total debt to equity is 0.33) and its price to free cash flow for the trailing 12 months is very low only 4.64. The average annual earnings growth for the next 5 years (per annum) is 9.9%. The forward annual dividend yield is quite high 2.52%. On August 28, 2012, Schnitzer Steel announces significant cost reductions, to cut 7% of workforce. The completion of these initiatives is expected to yield higher earnings and to increase shareholder returns. All these factors make SCHN stock quite attractive.

Business description from Yahoo Finance (see here):

Schnitzer Steel Industries, Inc. engages in recycling ferrous and nonferrous scrap metals, and used and salvaged vehicles. The company operates in three segments: Metals Recycling Business (MRB), Auto Parts Business (APB), and Steel Manufacturing Business (SMB). The MRB segment buys, collects, processes, recycles, sells, and brokerages ferrous scrap and nonferrous scrap metals. It processes mixed and large pieces of scrap metal into smaller pieces by crushing, sorting, shearing, shredding, and torching. The company was founded in 1906 and is headquartered in Portland, Oregon.

Chart: finviz.com

Source: 4 Materials Stocks With Positive Momentum