2 Materials Stocks to Buy for Long-Term Growth

We have been seeing some signs of economic growth in the U.S., recently. I am hesitant to declare victory just yet as we have seen plenty of false starts in the past few years. I am also very skeptical about homebuilding being the driver of growth in the near term as the lack of first-time buyers could cause building to slow.

materials stocks to buy

I am far more confident that housing will rebound over the next five years than I am about a robust recovery over the next 12 months. The ISM Manufacturing Index has been above 50 for 13 months in a row, indicating that this segment of the economy is continuing to slowly grind higher. The consensus among the always highly accurate economists is for growth to accelerate in the second half of the year and stay stronger in 2015.

I have no idea what the economy will do for the rest of this year. I’m not so sure that the economists have much of a handle on the question, either. I hope they are right about the near term but confess to being a tad skeptical. Once again, I am far more confident about the long-term recovery prospects of the global economy than I am about the short-term level of global activity.

At some point in the next five years or so, we will get back on a solid growth trajectory and we will see consumption of things like steel, paper and wood products accelerate. That should lift the price of some material stocks to levels several times higher than today depressed pricing.

With that in mind, here are two materials stocks to consider for their long-term potential.

Arcelor Mittal (MT)

Arcelor Mittal (MT) is one of the largest integrated steel companies in the world. It also has mining operations that produce materials like iron ore and coal. It has been reducing capacity and implementing tight cost controls to survive the economic downturn and is positioned to be a solid growth leader when we see stronger economic activity. At the same time, Arcelor has been expanding operations in some key market around the world like Canada, Brazil and the United States.

CEO Lakshmi N. Mittal has expressed confidence that the bottom is in for steel, and the future looks strong for the company he runs. He has a vested interest in being right as he and his family own more than a third of the company. The stock is incredibly cheap, trading at just 55% of book value. This stock traded for more than $80 per share before the recession and a return to just half of that level would be a huge return form the current sub-$15 stock.

Posco (PKX)

Korean steel company Posco (PKX) is also priced at bargain levels. The company has a new CEO who is refocusing the company on higher-margin businesses and divesting things like their energy and trading subsidiaries. The stock trades for about 60% of book value right now, so it’s certainly cheap. You will have some elite company as fellow shareholders as Brandes Investment Partners, Marty Whitman’s Third Avenue Fund and Charlie Munger’s Daily Journal (DJCO) are all large shareholders.

Bottom Line

I have no idea when the economy recovers to the point that steel consumption and prices increase rapidly. I don’t think anyone really does. But I am pretty sure that it will happen at some point in the next five years or so, and when it does these stocks will sell much higher than the current bargain levels.

As of this writing, Tim Melvin was long MT.

Article printed from InvestorPlace Media, https://investorplace.com/2014/07/materials-stocks-arcelor-posco/.

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