Best Sector #2: Materials Stocks
Some claim that we at the mercy of a commodities “super cycle” that will mean nothing but pain for metals, energy and agricultural commodities. But after materials stocks have taken a pounding in the last few years, it’s hard to argue there’s much more room for declines.
According to financial data provider FinViz, as a group, basic materials stocks are the only core sector of the S&P 500 that currently trades for a price-to-sales ratio of less than 1. Also, forward earnings estimates show materials stocks trading on average for a current P/E of about 14.7 — the second-lowest sector in the S&P — and a forward P/E of 13.1. That’s much less than the broader market’s average, and if you’re concerned about overstretched valuations in a sector like tech than it’s worth looking at how “cheap” materials stocks are.
One big risk, of course, is that the dollar will remain strong and keep commodity prices soft. And the idea of “tapering” at the Fed surely will keep a floor under the greenback in 2014.
But given how long the sector has sat out and the recent strength in materials, there’s momentum as we enter 2014. Just look at the 14% gains for the Materials SPDR (XLB) since July vs. 11% gains for the S&P 500 as proof that this late-blooming sector is looking good right now.