Basic Materials: One Of The Best Sectors To Play

The basic materials sector will include most natural resources used to make goods. This sector includes companies involved in the discovery, development, and processing of raw materials. This includes various metals (copper, gold, silver, etc.), agricultural inputs like fertilizers, lumber & wood (along with paper products) and specialty chemicals.

Sub-Sectors (Industries)

Greatest Strengths

If you know a specific industry inside-out (the needs and trends for copper, for example), you can make a lot of money. Basic materials companies’ financial health will vary following the demand vs supply cycle. This is a sector prone to show many significant stock price movements within a comparatively short period of time. If you can buy industry leaders at their bottoms, you will look like a genius in the next commodity boom.

Some companies in the chemical and specialty chemical industries offer products that will be bought no matter what is happening in the economy. Such companies that produce those stable products enjoy stronger pricing power, are less dependent on commodity prices, and could become good dividend growers.

On another topic, gold is often seen as an asset class of its own. Throughout most recessions, gold (the metal) and gold companies (mining or royalties) have done very well. In general, when the market goes into full panic mode, many investors seek a place to store their money. They don’t necessarily trust currencies (or governments) and believe gold is a more reliable currency. Therefore, if you hold gold stocks, you will likely see them doing nothing for several years, but they will look like saviors when there is panic in the streets. In my view, gold is a bet on fear. Over the long haul, its returns have matched inflation.

Greatest Weaknesses

The basic materials sector is relatively small when you only consider dividend paying companies. This is explained by the highly cyclical and volatile nature of the sector. The price of many commodities fluctuates a great deal, and it makes it difficult for management to plan steady and increasing dividend payouts.

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