Oil fueled gains have turned the tide for stocks since the second half of February. Prices have rebounded to hover near the $40 per barrel mark, sparking off gains for the broader markets. All the indices are now in the black for the year and a record rally shows no signs of abating. Not unsurprisingly, materials and energy stocks have regained much of their earlier popularity with investors.

However, several factors indicate that they may be inherently volatile choices. Instead, it may be better to focus on a sector like industrials which carries none of the inherent risks these sectors suffer from. At this point, the Industrials Sector SPDR (XLI) is up 5.6% year-to-date compared to 0.4% for the S&P 500. This is why picking select materials stocks may be a smart choice at this juncture.

Dollar Dips on Lower Rate Outlook

An unbroken surge in the dollar has been one of the factors contributing to the rise in oil prices. An increase in the dollar makes oil costlier for its importers, who purchase this commodity using foreign currency. However, a rising dollar has a downside for U.S. exporters of other goods.

But the surge in the dollar is likely to snap very quickly. Following a two-day advance, the dollar declined on Monday as traders opined that there was a slim chance of a rate hike in April. Chances of an increase in June have also dimmed. In such an environment, the dollar is likely to move lower. This will certainly be beneficial for most industrial product manufacturers.

Strengthening Economic Environment

The Federal Open Market Committee (FOMC) shied away from raising rates at its recently concluded policy meeting. The FOMC cited fears about a weakening global economy and the pace of price increases for such a move. However, it did acknowledge that risks to the outlook have diminished. Further, the Fed Chair admitted that the economy has strengthened and inflation was improving.

And there is sufficient reason for such a statement. In February, the U.S. economy added 242,000 jobs, easily outpacing the consensus estimate of 194,000. Meanwhile, unemployment remained flat at January’s significantly low level of 4.9%. Several other crucial indicators such as the ISM Manufacturing Index, construction spending and factory orders have shown significant improvements this month.

Oil Rebound Remains Volatile

At first glance, the rebound in oil prices is likely to benefit those companies from the industrials sector which are suppliers for the oil sector. However, this is not as clear as it seems since several oil and mining companies have recently announced reductions in capital expenditure. However, it is likely that as gains stabilize, related companies will begin to benefit.

At the same time, betting on related companies may not make for a smart choice. It may be better to choose those stocks which are suppliers to unrelated areas or have a sufficiently diverse customer base. Those conducting their business on a global scale may also make for strong bets.

Our Choices

As the market continues to surge, several investors are looking to cash in on those sectors which are making a major comeback. However, several of them are inherently risky bets. It would be better to select stocks from a sector such as industrials which carries a proportionately lower degree of risk. At the same time, it is important to select stocks with strong fundamentals and the ability to deliver appreciably high price gains. 

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry different weights while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

John Bean Technologies Corporation (JBT - Snapshot Report) is a leading global solutions provider to the food processing and air transportation industries.

John Bean Technologies has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. The company has expected earnings growth of 19.7% for the current year. Its earnings estimate for the current year has improved by 3.7% over the last 30 days.

Sonoco Products Co. (SON - Analyst Report) is a global manufacturer of consumer and industrial packaging products.

Sonoco Products has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 6.6% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 18.02, in line with the industry average.

Global Brass and Copper Holdings, Inc. (BRSS - Snapshot Report) converts, fabricates, processes and distributes brass and copper products in the U.S., Mexico and the Asia Pacific region.

Global Brass and Copper Holdings has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 8.7% for the current year. It has a P/E (F1) of 11.10, lower than the industry average of 14.61. Its earnings estimate for the current year has improved by 3.9% over the last 30 days.

Belden Inc. (BDC - Snapshot Report) is engaged in the design, manufacture and retail of cable, connectivity, and networking products.

Belden has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 6.1% for the current year. It has a P/E (F1) of 11.36, lower than the industry average of 15.58.

AZZ incorporated (AZZ - Snapshot Report) offers welding solutions, galvanizing services and specialty electrical equipment for the power sector and industrial companies.

AZZ has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 19% for the current year. It has a P/E (F1) of 16.00, lower than the industry average of 16.90.