Materials stocks are those companies that produce chemicals, construction materials, and paper products. Businesses involved in the exploration and processing of commodities are also included in this sector.
Materials demand is cyclical, rendering sector players extremely vulnerable to economic fluctuations. The demand for basic materials tends to drop when economic conditions deteriorate, which lowers prices and impacts the profitability of material producers. However, the materials sector can be impacted by a variety of factors, including the economic cycle. Supply chain challenges, legislation, and inflation are just a few of the many factors that could impact demand, prices, and industry profitability in the materials industry.
After Russia invaded Ukraine in 2022, a new challenge arose in the industry. The region provides essential metals for steel production and exports minerals for fertilizer, such as potash; therefore, the war caused disruptions in the worldwide supply chain for resources. Most basic materials' costs increased due to supply constraints, which had a significant impact on both the industry and the overall economy.
Looking forward, a cautiously positive view for the materials sector in 2025 has been strengthened by long-term structural demand and improved macroeconomic conditions. Persistent economic concerns in the United States and a noticeable slowdown in China, two important markets for industrial materials, burdened the sector in 2024. However, according to Fidelity, the situation seems more favorable for growth in 2025 as China implements economic stimulus measures and central banks in major economies currently lean toward monetary easing. Some subsectors stand to benefit from both a short-term cyclical recovery and advantageous long-term supply-demand imbalances, especially those related to copper and other crucial inputs for infrastructure and electrification. Furthermore, the sector's rate-sensitive industries, such as chemicals, may gain from lower interest rates, while more robust, high-quality firms may provide defensive strength. The sector is positioned for a potentially better performance in 2025 due to a combination of financial assistance, a possible recovery in Chinese demand, and strategic exposure to growth-linked materials.
Currently, according to a strategist for equity derivatives at Barclays, Stefano Pascale, options traders are undervaluing the risks associated with materials stocks because the sector's predicted volatility is close to historic lows, making downside protection cheap. Steel and paper companies are among the materials stocks that are susceptible to tariffs because of their dependence on international supply chains, and additional tariffs are anticipated to be announced soon by President Trump.
Despite this, Pascale commented:
"The volatility market is giving you an exceptionally good opportunity here of cheap materials puts. Even if you didn’t have a trade war, this would be, historically speaking, a very attractive trade."
Materials underperformed in 2018 due to Trump's tariffs, and similar drops may be seen this year, with the Dow down 7%. According to statistics provided by Bloomberg Intelligence, sell-side analysts have lowered their expectations for the material sector, anticipating earnings to climb 5.9% this year, down from an estimate of 16% in January. However, traders must consider liquidity risks, as the bid-ask spread for materials options is $0.20, as opposed to $0.04 for broader market options.
Methodology
We sifted through the Materials ETFs and online rankings to form an initial list of the 25 materials stocks. From the resultant dataset, we chose 11 stocks with the highest number of hedge fund investors, using Insider Monkey’s database of 1009 hedge funds in Q4 2024 to gauge hedge fund sentiment for stocks.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
Is Newmont Corporation (NEM) Worth Buying on the China H20 Chip Sale Ban?
A gold mine entry with a conveyor belt transporting minerals from the depths of a shaft.
Newmont Corporation (NYSE:NEM) is the largest gold miner in the world. In 2019, it acquired Goldcorp, and later that year, it merged its Nevada mines into a joint venture with rival Barrick. In November 2023, it acquired competitor Newcrest. Its holdings in two joint ventures and 17 fully or majority-owned mines throughout the Americas, Africa, Australia, and Papua New Guinea are part of its portfolio. After selling six higher-cost, smaller mines, the business is anticipated to sell about 5.5 million ounces of gold from its core mines in 2025, most likely starting in the middle of the same year. The firm also generates significant amounts of copper, silver, zinc, and lead as byproducts. At the end of December 2024, it possessed substantial byproduct reserves in addition to roughly 20 years' worth of gold reserves.
Newmont Corporation (NYSE:NEM) generated $2.9 billion in free cash flow in 2024, including a record $1.6 billion in Q4, due to robust cash flow management, increased sales, and high gold prices. The business paid off $1.4 billion in debt, bringing its total debt below $8 billion, maintained a healthy balance sheet with $3.6 billion in cash, and distributed $2.3 billion in dividends and stock buybacks to shareholders in 2024.
In 2024, Newmont Corporation (NYSE:NEM) exceeded its production target, producing 6.8 million ounces of gold and over 150,000 tons of copper, with 85% coming from its core portfolio. It successfully sold or secured definite agreements to sell all six of its non-core businesses, potentially generating up to $4.3 billion in pretax profits, with about $2.5 billion in cash proceeds expected in the first half of 2025.
Overall, NEM ranks 5th on our list of the best materials stocks to buy according to hedge funds. While we acknowledge the potential of NEM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. There is an AI stock that went up since the beginning of 2025, while popular AI stocks lost around 25%. If you are looking for an AI stock that is more promising than NEM but that trades at less than 5 times its earnings, check out our report about thischeapest AI stock.
