As the market heads into the dog days of summer, investors may be putting their portfolios on autopilot and waiting to get direction in the Fall. That may be fine for some stocks. But if you own basic materials stocks, you should take one more look before holding through the summer. While there are some solid performers, there are other materials stocks to dump.
Materials stocks are cyclical in nature and heavily dependent on the health of the economy. And right now, the state of the economy is confounding analysts, economists, and investors alike. Despite more evidence that points to the possibility of a soft landing, concerns about a global recession dominate the mind space of many investors.
Factor in geopolitical unrest, rising interest rates, and a pointed shift away from oil and gas, and you have a recipe for continued volatility. That’s why it may be time to step away from these under-performers that I found using a simple stock screener.
Vale (VALE)
A month ago, I might have put Vale (NYSE:VALE) on a list of material stocks to buy. In fact, I can see it’s a favorite among a few of the InvestorPlace analysts.
But a disappointing earnings report in late July has changed my outlook. That’s why the producer of iron ore and iron ore pellets makes this list of materials stocks to dump.
VALE stock is up approximately 7% this year and 4.4% over the last month. But the stock is down about 7% since it missed on both revenue and earnings when it reported in late-July. At a time when over 80% of all companies are beating earnings expectations, this miss is glaring, and investors are responding accordingly.
More concerning is that revenue and earnings are declining on a year-over-year basis. Iron ore will always have cyclical demand which may make Vale a watchlist candidate. But for now, VALE stock is giving off a sell signal that the market shouldn’t ignore.
Mercer International (MERC)
If you believe that housing demand will continue to rise in the second half of 2023, you’ll cry foul on Mercer International (NASDAQ:MERC) making this list of materials stocks to dump. After all, more building activity would be bullish for lumber prices. In fact, that may be why the stock is up 11.5% in the 20 days ending August 1, 2023.
I’m not convinced. The Federal Reserve has signaled on multiple occasions that there is at least one more rate hike in store for investors. And even if that’s the end of the cycle, bullish investors are backing away from predictions that rates will be going down before 2024.
Plus, in the short-term, the company is curtailing operation at its Celgar pulp mill in British Columbia. The shutdown that started on July 29 will last until August 28, 2023. This could put pressure on quarterly revenue, which is less of a problem than earnings, which turned negative last quarter.
Mercer does offer an attractive dividend which currently has a yield of 3.4% and has a payout ratio of 15%. Whether that’s enough to coax you into a stock that’s down 45.7% in the last 12 months is the kind of decision that speculative investors must consider.
Antofagasta (ANFTF)
Antofagasta (OTCMKTS:ANFTF) is the last stock on this list of materials stocks to dump. And like Mercer, this one comes with a potentially bullish catalyst. That comes from the company’s mining operations that focus on extracting copper.
Copper is an essential metal for a variety of applications, including electric vehicle manufacturing. But commodity prices remain volatile, and the takeoff in copper prices hasn’t appeared as expected.
Notably, in July, the Chilean-based company lowered its guidance for the rest of 2023 at its Los Pelambres operation in Chile. This was despite the fact that the company cited higher quarterly copper production. Now, it’s expected that this increased production may come at a higher cost to the company. In May, the Chilean government announced a mining tax and royalty reform that will increase the amount of tax that miners like Antofagasta pay to the government.
For those concerned about profitability taking a hit in the coming quarters via a recession, this is a stock with an unfavorable backdrop to avoid.
On the date of publication, Chris Markoch did not have (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.
