Don’t Shun Every Last Materials Stock

One of the more interesting developments in the stock market this year has been the woeful underperformance of materials stocks.

Even amid signs that the economy is trying to improve, the companies that make the stuff that’s used to make stuff have been reporting terrible earnings, and their stock prices have plunged as a result. Just look at Cliffs Natural Resources (NYSE:CLF), a leading provider of iron ore to steel companies. CLF shares have fallen by almost 70% in the past year and are down more than 40% in 2013 alone.

If you dig it up out of the ground and use it to make stuff, nobody wants it. Economic growth in the U.S. has been sluggish, and the eurozone is still struggling to resolve financial issues and economic activity has ground to a halt. In addition, inflation — which historically has been an important driver of metals prices — has been nonexistent until now. In recent weeks, though, we have seen some signs that prices are perking up in both China and the United States.

Many investors have asked how we can have a strong economic recovery without the materials stocks eventually recovering. The answer is that we can’t — but we are starting to see the early signs of a recovery in the miners and metal companies. The Fed intends to continue its economic stimulus programs until at least 2015, and that should be good for the economy and these sensitive stocks.

Although many of the bigger metals and mining stocks remain under pressure and have terrible scores on my Portfolio Grader (Cliffs, for example, remains an F), some of the smaller, more specialized companies are starting to turn around.

RTI International (NYSE:RTI) produces and supplies titanium and related products around the world. The company sells titanium in sheet and plate form to customers who ultimately mold into products for the aerospace, defense and medical industries. Earnings have exploded with gains of more than 200% in the past year and the stock receives a B in Portfolio Grader.

Worthington Industries (NYSE:WOR) is another materials-related company that is seeing demand increases and exciting earnings growth in what is perceived to be a weak environment for metals companies. The company recently reported record results — particularly in their cylinders division, which makes pressure cylinders for everything from oil and gas storage to helium tanks for filling balloons. Earnings for the quarter were up over 160% on a year-over-year basis. WOR also receives a B from Portfolio Grader.

Although many of the miners and metals producers still are weak, there are pockets of strength. It is unlikely that the economy can gain strength without the material companies seeing better sales and earnings growth, so while it might be too soon to buy most of them, it is worth watching them for signs of fundamental improvement in the months ahead.

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