The Materials Select Sector SPDR (NYSEARCA:XLB) ETF has an AUM of $5.5 billion and is currently underperforming the broader market by a few percentage points. The S&P 500 and Nasdaq Composite ended May up 10.6% and 11.5% for the year, while XLB is up just under 7.7%. While this may be bad news for some, it is an opportunity for investors to put their money into some undervalued materials stocks.
Below are three of them to consider.
Rio Tinto (RIO)
Rio Tinto (NYSE:RIO) is a diversified business that operates in the exploration, mining and processing of mineral resources on a global scale. The company’s main operating segments include iron ore, aluminum and minerals. The iron ore segment represented 80% of Rio Tinto’s $11.8 billion net income in 2023. That business has had to deal with tepid growth in recent earnings periods. Again, manufacturing, automotive and construction sectors are reeling from higher interest rates, keeping price growth for iron ore relatively tempered. The macroeconomic environment for iron ore, of course, will not remain as such forever. Inflation does appear to be cooling again, which should come as a welcome sign to investors.
Rio Tinto trades at an attractive valuation multiple: 9.6x forward earnings. The miner has also shown it is dedicated to returning capital to shareholders. In February, Rio Tinto announced a dividend of $2.58/share, translating into a dividend yield of about 6.2%.
Linde (LIN)
Linde (NASDAQ:LIN) is a U.K.-based industrial that develops various atmospheric and rare gases and happens to be the largest industrial gas company in the world. In particular, Linde supplies oxygen, nitrogen and hydrogen to both factories and hospitals. Outside of those kinds of customers, the company’s end markets include chemicals and energy businesses as well as electronics, metals and mining firms. Because Linde’s gas products are critical to a variety of old-economy sectors, those looking to ascertain the level of economic activity within the industrial sector should look no further than Linde’s earnings reports and guidance.
In its first-quarter earnings report for fiscal year 2024, Linde reported volume decreases in both its Americas and European end-markets. The industrial gas firm cited declines in demand from manufacturing, healthcare and electronics as reasons for the slowdown.
Despite the ongoing doldrums, Linde remains a must-have for investors interested in the long-term prospects of the materials sector. LIN shares have gained a little over 6% year-to-date (YTD) and could yield higher returns as the macroeconomic environment continues to make slow yet meaningful improvements.
Vulcan Materials Company (VMC)
Based in Birmingham, Alabama, Vulcan Materials Company (NYSE:VMC) produces and sells materials as well as other supplies for the construction industry. Asphalt, concrete and calcium are amongst the firm’s main product segments. Similar to the other entries on this list, Vulcan Materials has had to deal with waning demand from its core end market. In the firm’s first-quarter results for fiscal year 2024, total revenue declined 6.2% to $1.5 billion from $1.6 billion in 2023. That was largely related to lower shipment volumes. Margins, on the other hand, increased meaningfully, due to better pricing power.
The materials firm expects the pricing environment for their products to improve throughout the year and even issued rosy adjusted EBITDA guidance. Vulcan Materials expects to generate between $2.15 and $2.30 billion in adjusted EBITDA in 2024.
VMC shares have risen more than 13% YTD. If management is correct in its guidance, VMC could make a successful investment in the materials space.
On the date of publication, Tyrik Torres did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.