Investors are getting back to basics.
Rising demand for essentials such as roads and infrastructure by the world's emerging countries has transformed the providers of basic materials into hot tickets.
Commodity prices are rapidly increasing and overall supply isn't keeping up with demand. Once considered downright boring, the stocks of traditional companies involved in steel, copper, aluminum, zinc, nickel and chemical production have enjoyed a dramatic resurgence.
Many were caught off-guard.
"Ten years ago, the last thing investors or businesses put money into was copper, gold or coal mines, or any other basic industries," said Richard Cripps, chief market strategist with Stifel Nicolaus in Baltimore. "There was lack of investment in capacity for them because the money was going into technology and biotech, which has now created a shortage."
One of Cripps' favorite stocks, Bucyrus International Inc. (BUCY), would hardly be considered sexy by most investors. Yet the Wisconsin-based manufacturer of electric mining shovels, rotary blast drills and drag lines used in coal projects has seen its stock rise 54 percent this year following a 48 percent increase last year.
Another of Cripps' recommendations, Allegheny Technologies Inc. (ATI), is a Pittsburgh-based producer of stainless steel and specialty materials for world markets. Its stock is up 13 percent this year after a 151 percent gain last year.
"History is replete with examples of producers finding themselves rewarded with outsize profits, so they increase capacity, which eventually leads to overcapacity," Cripps said. "However, there's no thought that we'll reach that point soon, and if we do, the cause will more likely be recession rather than fundamental supply and demand."
What's notable about this global boom is that countries are doing what the United States did 50 years ago to expand its infrastructure. A number of experts believe the trend is in the early stages of what could be a 10- to 20-year period of huge worldwide demand with only recession stalling the onslaught from time to time.
"In the U.S., there will be huge additional worldwide demand falling on industries such as basic materials, industrial and transport companies," said James Paulsen, chief investment strategist with Wells Capital Management in Minneapolis. "I would argue that these companies therefore have a pretty good profile going forward."
Paulsen, who expects any worldwide recession to be a long way off, considers the most recent headline-grabbing events mostly mid-cycle adjustments of economic components such as housing that had gotten out of sync.
"The U.S. economy seems to be slowing down and it is hard for many investors to look beyond our borders, but most of the world is experiencing very good economic growth," said David MacGregor, senior research analyst with Longbow Research in Independence, Ohio.
MacGregor points to several strong-performing stocks well worth watching.
He'd spotlight Cleveland-Cliffs Inc. (CLF), a Cleveland-based company involved in production of iron ore pellets in North America and Australia, whose stock is up 109 percent this year after last year's 11 percent gain.
Companhia Vale do Rio Doce (RIO), a Brazilian producer and exporter of iron ore, nickel, copper, precious metals and other products in 19 countries, is another noteworthy stock that is up 148 percent this year following a 19 percent increase last year.
"There's a huge backlog of orders for commercial jets right now, which is putting a lot of stress on markets like the titanium market and driven up prices," MacGregor said. "We are in an overall bull market for materials being driven by global growth."
This is a wild time in the once moribund field of basic materials, with companies focusing on their core businesses and unloading ancillary operations they'd previously added in order to broaden their profit base. Iron ore and aluminum mining, for example, can generate more profits than the products of the businesses that use their metals. Meanwhile, smaller innovators also are entering the fray.
For many, one attraction of investing in basic materials is that they're easier to understand than more complex investments. But commodity trends are not an easy call.
There are many ways to play the basic materials boom, including individual stocks, exchange-traded funds and mutual funds.
Among stocks, Cripps recommends Vulcan Materials Co. (VMC), an Alabama-based firm that makes road construction materials composed of sand, gravel and crushed stone. Meanwhile, MacGregor considers BHP Billiton Ltd. (BHP), an Australian mining firm, and Rio Tinto PLC (RTP), a London-based mining company, to be noteworthy.
Exchanged-traded funds that focus on basic materials include:
• Vanguard Materials ETF (VAW) that has a 12-month return of 36 percent.
• Materials Select Sector SPDR (XLB), up 33 percent.
• iShares Dow Jones U.S. Basic Materials Sector Index Fund (IYM), up 38 percent.
Portfolios of those ETFs include the familiar stocks E.I. Du Pont (DD), Dow Chemical Co. (DOW), Alcoa Inc. (AA) and Monsanto Co. (MON).In addition, the mutual fund ProFunds Basic Materials UltraSector-Investor Shares (BMPIX) seeks investment results that correspond to 150 percent of the daily performance of the Dow Jones U.S. Basic Materials Sector Index. It is riskier in that it uses leveraged investment techniques in order to accomplish this.
Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, P.O. Box 874702, Tempe, Ariz. 85287-4702, or by e-mail at [email protected].