The basic materials sector is often considered as a foundation to the economy. It deals with the extraction and processing of many different raw materials that are used for countless products and services. Owning stock in this sector gives you access to the earliest economic stage. The demand for basic materials is largely tied to the demand for the consumer products they make and the services they power. One common concern throughout the sector revolves around the environmental impact of these companies. There are negative environmental issues coinciding with the extraction, use, and disposal of many of these materials. As regulations and public opinions shift, the industry will need to transition with them.
Common Sector Themes
Commodities: There is little, if any, differentiation of the goods that many of these companies sell. That can leave them vulnerable to the spot price that people are willing to pay for the material they produce at any given time, which can limit profitability and growth. Some companies can carve out advantages, but much of the demand is based strictly on supply.
Environment: The production, use, and disposal of many of these products can be harmful to the environment. In recent years, consumer trends place a greater importance on sustainable and green corporate practices. That leaves many trying to adjust. How will this impact earnings in the future?
Maturity: Some of these companies have been around for over a hundred years. You will find a lot of them are late in their growth cycle. That means that they will typically pay out a fair amount of their earnings through dividends, and they will also have a vast amount of historic data to look back on. You may be able to find some value and stability in this sector.
This industry works with and sells chemicals that are used in a variety of fields. They are vital to make products like ink, plastic, cosmetics, food, medicine, and textiles to name a few. Although you may not have ever heard of many of these companies, they play an important role in many of the products you use every day. Additionally, a large segment of this industry is in agriculture, and some of these companies play a key role in feeding an ever-growing population.
Examples: Air Products & Chemicals Inc. (APD), Sherwin-Williams Co. (SHW), Dow Inc. (DOW)
This group is dominated by oil and gas companies. It deals with the exploration, extraction, transportation, refinement, and marketing of oil and gas. While much of the economy is faced with an added expense by a rise in oil prices, energy companies may receive a net benefit since they can charge more. With that in mind, the profitability of the sector relies heavily on the price of oil. Regulations are in place to try and keep things running smoothly, but an oversupply can severely hurt profit margins. Additionally, as alternative energy becomes more popular and the electric car industry grows, investors worry about the long-term demand for oil. Many energy companies invest internally with the goal of adopting greener practices. Some may be in a better position to make this transition than others, and you can typically learn more about this on their websites.
Examples: Exxon Mobil (XOM), Chevron (CVX), ConocoPhillips (COP)
Metals & Mining
Businesses in this sector work on the extraction and refinement of a variety of metals. They provide the steel, copper, aluminum, gold, and silver that consumers will find in a vast array of products. Like oil, an increase in the spot price of these metals could create a net benefit for the mining companies, conversely adding costs to a lot of businesses in other sectors that manufacture metal goods. On the other hand, low commodity prices can hurt their profitability. Keep in mind that during times of economic uncertainty, many people look to metals, like gold, as a safe haven to store their money. If spot prices go up during times of fear, the mining companies may also feel the benefit. If you own some stock in them, it may offset some losses in other areas.
Examples: Newmont Mining Corp. (NEM), Nucor Corp. (NUE), Freeport-McMoRan Inc. (FCX)
The economy is categorized into different sectors. They allow investors to group together businesses that operate in similar fields. Different sectors have different common themes and characteristics. For this reason, share prices of similar stocks can move together to a certain degree. With that in mind, investors typically want exposure to multiple, if not all, sectors in their portfolio. This way, while some sectors may be down, others might be trending up. That can offset losses.
Within these sectors, there are a variety of industries. If you are having trouble deciding what to buy to gain exposure in a particular sector, you can check here for some ideas. The examples of individual stocks were chosen because they are some of the largest players in the industry. We are not recommending any particular sector, industry, or stock. Be sure to not only choose opportunities that excite you, but also ones that are diverse and fit your risk tolerance. Finally, there are no guarantees that any individual stock, industry, or sector will behave in any particular way at any particular time. Anything can happen. This information is solely based on past performance. Past performance does not guarantee future results.