We recently compiled a list of 10 Best Basic Materials Stocks To Buy Now. In this article, we will look at where Sherwin-Williams Co. (NYSE:SHW) ranks among the best basic materials stocks to buy now.
The specialty chemicals industry holds the highest market weight (41.75%) among the several industries that make up the basic materials sector, despite its modest year-to-date return of 7.20%. Among the top performers in this industry are copper and gold, which had YTD returns of 28.25% and 28.32%, respectively. Additionally, building materials have grown rapidly, yielding a 19.46% YTD return. Nonetheless, several sectors of the economy are struggling. For example, steel and agricultural inputs have negative year-to-date returns of 13.78% and 2.08%, respectively. Coking coal lags with a YTD return of -19.12%, while other top performers include aluminum (33.03%), other precious metals & mining (48.76%), and silver (42.01%). Lastly, the chemicals industry has achieved a 3.17% YTD return. Overall, all industries in the basic materials sector experienced a 10.40% YTD return.
Amidst the basic material sector’s growth, as per Deloitte’s, the future of materials insights: science and technology have advanced to the point where scientists can now design materials with specific purposes, which fosters innovation in the chemical industry. Stakeholders are pressing companies to reassess the life cycle of their products with an emphasis on lowering emissions as sustainability gains prominence. Offering products to companies that make electric vehicles rather than those that make internal combustion engines, for instance, might drastically reduce scope 3 emissions. Involvement in circular ecosystems provides a viable way to reduce waste and provide new value opportunities. Although there are still obstacles to overcome, bio-based feedstocks have the potential to lower emissions and improve supply chain resilience. Furthermore, by solving the shortcomings of conventional mechanical recycling techniques, circular solutions like chemical recycling and carbon capture and utilization (CCU) offer creative end-of-life possibilities for materials.
Meanwhile, according to Fidelty, the financial services corporation, the materials market affected by recession worries, which is strongly tied to the economic cycle, produced solid but slow returns over the previous year. It follows general economic patterns in rising and falling levels as a cyclical industry. Materials stocks have been undervalued as the economy stands on the verge of a recession. A more positive economic picture in 2024, though, would act as a spur to expansion. Early phases of economic recovery have historically seen strong performance from this industry, and favorable supply-demand dynamics, especially among copper miners and American chemical manufacturers, could offer long-term investment opportunities. The industry may perform better as the economic cycle develops, setting it up for a potential comeback. As per Ashley Fernandes, Fidelity Sector Portfolio Manager:
“This cyclical sector could be well positioned if or when the economy improves.”
However, the ING Group, in its 2024 outlook report for the materials sector, pointed out the possible risks for iron ore:
“Looking further ahead, downside risks include China looking to replace older steel capacity with electric arc furnace capacity in order to help the country meet its decarbonisation goals. Growth in electric arc furnace (EAF) capacity at the expense of basic oxygen furnace (BOF) capacity will be a concern for the medium to long-term outlook for Chinese iron ore demand, reflecting increasing secondary production. Currently, 9.5% of China’s steel capacities are electric steel mills. The country plans to increase the share of steel from EAFs to 15% by 2025 amid a drive to reduce carbon emissions, increasing its appetite for ferrous scrap. China aims to achieve carbon neutrality by 2060.”
Methodology:
We sifted through holdings of Basic Materials ETFs and online rankings to form an initial list of 20 Basic Materials stocks. Then we selected the 10 stocks that were the most popular among institutional investors. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024. We have used the stocks’ market cap as a tie-breaker in case two or more stocks have the same number of hedge funds invested.
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 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
Sherwin-Williams Co. (NYSE:SHW)
Number of Hedge Fund Holders: 76
In the US, Sherwin-Williams Co. (NYSE:SHW) is the biggest supplier of architectural paint. The company sells high-quality paint at higher price points than most of its competitors and has over 5,000 outlets. The firm also sells its products in big-box stores and provides coatings for original equipment manufacturers. Over 74% of Sherwin’s business is conducted in North America, and the company gained a significant amount of worldwide exposure when it bought Valspar in 2016. Its formerly meager retail presence has been strengthened by the acquisition of Valspar, as Sherwin was granted an exclusive agreement in 2018 as a result of Valspar’s long-standing relationship with Lowe’s. In addition, Sherwin acquired Valspar’s industrial division, growing its performance coatings business.
In a more comprehensive research note on U.S. Chemicals, BMO Capital increased its price objective for Sherwin-Williams from $400 to $425 and maintained its Outperform rating for the company’s shares. The analyst informs that while there were pockets of incremental weakening, namely in Europe and China, the firm’s channel checks point to a small number of end markets and commodities that enjoyed relative strength. While demand in the Paint Stores Group is still lumpy due to challenges from rising mortgage rates, share gains from prior investments and a more comprehensive level of pricing in the quarter should support growth, according to BMO.
Evercore ISI maintained its Outperform rating on the shares and increased the company’s price target for Sherwin-Williams Co. (NYSE:SHW) from $365 to $380. Investors are informed that Sherwin’s first analyst day with CEO Heidi Petz “reinforced the customer service and winning culture which defines the company.” The firm claims that the new medium-term targets “suggest plenty of upside” to the Street’s $12.85 EPS estimate for 2025 when volume shifts, despite the fact that no changes were given regarding 2024.
SHWs products have been preferred by professional painters for many years, which has resulted in strong brand loyalty and price power.
E. Shaw’s D E Shaw is the largest stakeholder in the company from among the funds in Insider Monkey’s database. It owns 1,524,367 shares worth $454.92 million as of Q2.
Overall SHW ranks 2nd on our list of the best basic material stocks to buy now. While we acknowledge the potential of the SHW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SHW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published on Insider Monkey.
