Materials

If there are shortages, bottlenecks, and commodity inflation everywhere, why is the rating for the Materials sector so uninspiring? Although valuations are compelling for Materials groups, the overall decline in the rankings can be traced to EPS revisions and macro influences, like the U.S. dollar and low rates.

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March 23rd marked the one-year anniversary of the COVID-19 bear-market bottom. We are all eager to turn the page on the pandemic ordeal and move forward to brighter days ahead. Looks like some big help is coming our way.

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Someone forgot to tell commodity trades this is an era of diversity of inclusivity: This year’s leap in the S&P/Goldman Sachs Commodity Index has been entirely the result of its heavily-weighted energy inputs.

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After a strong 2016 and a “Bridesmaid” (i.e., sector runner-up) performance in 2017, the Materials sector seemed primed to benefit from the “late cycle” character of the economy in 2018.

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While watching a forecast go awry is painful, there’s an alternative that we consider to be even worse: the failure to be paid on an accurate forecast. The resulting feeling of helplessness must be similar to that of a corporate director who manages to lose money on inside information.

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Commodities have enjoyed a strong year thus far, and the GS Scores on the Materials sector have followed suit (albeit with a slight lag), as highlighted in June’s “Of Special Interest” section.

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The Leuthold Materials sector jumped five spots to #3 in the June Group Selection (GS) rankings, its highest ranking in eight years and the first reading outside of the bottom four in almost four years.

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We’ve been highlighting the overinvestment (or malinvestment) risks in commodity-oriented equity sectors for the past three years, but we certainly did not foresee those risks exploding the way they have in the oil market over the last seven months.

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The year’s second biggest surprise (next to the relentless drop in bond yields) might be the YTD bounce in the major commodity indexes.

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Well-rounded factor strength, coupled with an intriguing fundamental backdrop, lead us to our first Materials group holding in a year.

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All ten of the S&P 500 sectors recorded a sequential increase in four-quarter trailing net profit margins. But consider where sector margins stand today relative to their 25-year medians. Eight of ten S&P 500 sectors are recording profit margins well above their long-term medians.

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We’ve discussed the interrelationships between industrial commodities, commodity-oriented equities and Emerging Market stocks. Getting one’s bet right on any of these three has generally led to profitable positions in all three. But that certainly hasn’t been true in recent months.

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Our Tech sector outpaced the S&P 500 Tech sector by  1400 bps and our Materials sector lagged the S&P 500 Materials by 2300 bps. Here’s why…

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While gold garnered most of the headlines last year (down 27%), commodities performed badly across the board in 2013. We expect more of the same in 2014.

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Following a great year for trend-following, capitalizing on key reversals in sector performance will be important in winning the 2014 performance derby.

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Momentum and Value worked in 2013. Materials and Financials were the easiest sectors to exploit; Discretionary and Tech the most difficult. Momentum works in December; Value and Small Caps at the start of the year.

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Both models have numerous Information Technology and Financials groups in Attractive territory. Neither model has any Unattractive Tech groups. Alternatively, neither model has any Attractive Utilities groups, while several Utilities rate Unattractive in each.

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Both models (particularly domestic) have a number of Attractive rated Information Technology groups and no Unattractive rated Tech groups. Financials’ domination of the Global Attractive range continues.

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We’ve noted before that profit margin gains since the technology boom have been primarily a Large Cap phenomenon.

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We examine Emerging Markets from both the top-down and bottom-up perspectives as we try to identify where to move and what to expect. We check in on two successful EM thematic group ideas as well.

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