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5 Great Basic Materials Stocks to Buy Ahead of Q2 Earnings

By Swarup Gupta, Zacks Investment Research

http://bit.ly/2JMYZGk

Over the past few years, basic materials was an unloved sector due to a combination of sluggish growth and stagnant inflation. Its capital-intensive nature made it an unsuitable investment choice in such an environment. But the unfashionable choices from this space have once again caught the imagination of investors. A spurt in inflation and Trump’s protectionist trade policy has skewed the pitch in favor of domestic producers.

Currently, multiple factors are working in the sector’s favor, boosting its investment worthiness in the short run. Prospects of a sustained period of growth and a pickup in inflation are likely to brighten the prospects of basic materials companies.

Further, earnings and revenues from the sector are likely to improve in the second quarter, which makes it a good idea to pick up select basic materials’ stocks, which are also likely to outperform their earnings estimates.

Inflation Surges in June, Tariffs Boost Sector Prospects

In June, the headline CPI index surged 2.9% year over year, the highest such increase since February 2012. Producer prices also increased over the month with the PPI index posting its largest annual increase in six and a half years.

Gasoline prices boosted both indexes, with the PPI advancing 3.4%, the largest increase since November 2011. These reports clearly indicate that a steady-state inflationary trend is building in the U.S. economy.

Also, while Trump’s tax cuts are likely to boost U.S. companies as a whole, his decision to impose tariffs on steel and aluminum is likely to provide a short-term boost to basic materials. On Jul 6, the United States imposed tariffs on $34 billion worth of Chinese goods, including a 25% import duty on steel.

On May 31, the Trump administration had imposed tariffs on steel and aluminum imported from the EU, Canada and Mexico. In both instances, the countries on the receiving end have either threatened to retaliate or are already pursuing such actions.

Earnings Prospects Remain Strong

During the first quarter, earnings and revenue growth for basic materials was second only to the energy sector. Total Q1 earnings were up 56.4% on 24.3% higher revenues. This trend is likely to continue this earnings season.

Total Q2 earnings for the sector are expected to be up 52% on 24.3% higher revenues. This is second only to expectations for energy, total Q2 earnings for which are expected to be up 137% on 18.7% higher revenues.

That’s far better than the more vaunted autos and conglomerate sectors, earnings for which are expected to decline by 9.7% and 6.3%, respectively, during the second quarter. For the S&P 500 index as a whole, total Q2 earnings are expected to be up 21% from the same period last year on 8.3% higher revenues.

Our Choices

After remaining out of favor for quite some time, basic materials stocks are making something of a comeback. Stronger inflation and the Trump administration’s tariffs have boosted sector prospects significantly. Meanwhile, in keeping with stellar first-quarter results, second-quarter numbers are likely to be impressive.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

You could further narrow down the list of choices by looking at stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Great Basic Materials Stocks to Buy Ahead of Q2 Earnings: KapStone Paper and Packaging Corporation (KS)

KapStone Paper and Packaging Corporation (NYSE:KS) is a producer and seller of a variety of corrugated products, containerboards and specialty paper products on a global basis.

Great Basic Materials Stocks to Buy Ahead of Q2 Earnings: KapStone Paper and Packaging Corporation (KS)

KapStone has beaten the Zacks Consensus Estimate for earnings in two of last four consecutive quarters, with an average positive earnings surprise of 12.9%.

Powered with the right combination of the two key ingredients – an Earnings ESP of +2.27% and a Zacks Rank of 1 – our proven model shows that an earnings beat is expected for KapStone in the to-be-reported quarter as well.

The company is expected to report second-quarter 2018 results on Jul 25.

Great Basic Materials Stocks to Buy Ahead of Q2 Earnings: Eastman Chemical Company (EMN)

Eastman Chemical Company (NYSE:EMN) manufactures and sells chemicals, plastics and fibers.

Great Basic Materials Stocks to Buy Ahead of Q2 Earnings: Eastman Chemical Company (EMN)

Eastman Chemical has beaten the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 17.8%.

Powered with the right combination of the two key ingredients – an Earnings ESP of +1.25% and a Zacks Rank of 2 – our proven model shows that an earnings beat is expected for Eastman Chemical in the to-be-reported quarter as well.

The company is expected to report second-quarter 2018 results on Jul 26.

Great Basic Materials Stocks to Buy Ahead of Q2 Earnings: TimkenSteel Corp (TMST)

TimkenSteel Corp (NYSE:TMST) engages in manufacturing alloy steel, as well as carbon and micro-alloy steel.

Great Basic Materials Stocks to Buy Ahead of Q2 Earnings: TimkenSteel Corp (TMST)
Source: Shutterstocks

Powered with the right combination of the two key ingredients – an Earnings ESP of +4.21% and a Zacks Rank of 2 – our proven model shows that an earnings beat is expected for TimkenSteel in the to-be-reported quarter.

The company is expected to report second-quarter 2018 results on Jul 26.

Great Basic Materials Stocks to Buy Ahead of Q2 Earnings: Domtar Corp (UFS)

Domtar Corp (NYSE:UFS) manufactures and distributes a wide array of fiber-based products including communication papers, specialty and packaging papers and adult incontinence products.

Great Basic Materials Stocks to Buy Ahead of Q2 Earnings: Domtar Corp (UFS)

Domtar has beaten the Zacks Consensus Estimate for earnings in three of the last four consecutive quarters, with an average positive earnings surprise of 18.7%.

Powered with the right combination of the two key ingredients – an Earnings ESP of +1.70% and a Zacks Rank of 1 – our proven model shows that an earnings beat is expected for Domtar in the to-be-reported quarter as well.

The company is expected to report second-quarter 2018 results on Aug 1.

Great Basic Materials Stocks to Buy Ahead of Q2 Earnings: Rayonier Advanced Materials Inc (RYAM)

Rayonier Advanced Materials Inc (NYSE:RYAM) operates as a global supplier of cellulose specialties products.

Great Basic Materials Stocks to Buy Ahead of Q2 Earnings: Rayonier Advanced Materials Inc (RYAM)

Rayonier has beaten the Zacks Consensus Estimate for earnings in two of the last four consecutive quarters, with an average positive earnings surprise of 41.7%.

Powered with the right combination of the two key ingredients – an Earnings ESP of +8.74% and a Zacks Rank of 2 – our proven model shows that an earnings beat is expected for Rayonier in the to-be-reported quarter as well.

The company is expected to second-quarter 2018 results on Aug 2.

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Article printed from InvestorPlace Media, https://investorplace.com/2018/07/5-great-basic-materials-stocks-buy-ahead-q2-earnings-ggsyn/.

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