3 Basic Materials Stocks to Sell as the Commodity Cycle Turns in 2024 (2024)

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The basic materials sector featurescompanies that discover, develop, and process raw materials. These are frequently companies that deal in commodities that are cyclical and can be more volatile than the broader market. Because commodities are subject to the law of supply and demand there are always several basic materials stocks to sell or buy.

Basic materials stocks can be good long-term investments if a company’s dividend is outpacing inflation. Otherwise, this is a sector that’s usually filled with short-term traders who are looking to profit as the price of specific commodities increases.

However, when commodity cycles turn negative, those gains can quickly turn into losses. This is why you need to look for signs a stock is overvalued. One of these signs is the relative strength indicator (RSI). This is a technical signal that predicts a stock’s momentum. The RSI compares the strength of a stock on days when the prices go up compared to days when prices go down. An RSI of over 70 indicates a stock is overbought.

Other metrics include news coverage and analyst sentiment. And when stocks check off two or all three of these boxes, it’s time to avoid that stock or, if you’re so inclined, to take a short position in that stock.

Here are three basic materials stocks to sell or short before the new year is no longer new. I found these stocks, in part, by using a stock screener for most overbought stocks.

Intrepid Potash (IPI)

3 Basic Materials Stocks to Sell as the Commodity Cycle Turns in 2024 (1)

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In 2022, the price of potash soared as Russia launched its war on Ukraine which raised speculation over supply concerns for potash, a key component in fertilizer among other things. As one of the leading extractors and producers of potash, shares of Intrepid Potash (NYSE:IPI) soared to a seven-year high of over $100 per share.

But with demand for potash already normalizing, the company and the industry is dealing with a supply glut as American farmers used less fertilizer than expected in 2023, perhaps owing to higher prices.

That’s the state of things in January 2024, and that makes the situation with Intrepid Potash fairly clear. This is a company with a stellar balance sheet with no debt. It will be just fine and is likely to reward long-term investors. But in the short term, there’s little reason to expect much growth from IPI stock.

The company reported sharply lower year-over-year (YOY) earnings in the third quarter with earnings going negative for the first time in 10 quarters. What made it worse was that analysts were expecting negative earnings and the company still missed.

Ryerson (RYI)

3 Basic Materials Stocks to Sell as the Commodity Cycle Turns in 2024 (2)

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Ryerson (NYSE:RYI) is next on this list of basic materials stocks to sell. The company is a metal products producer and distributor headquartered in Chicago, Illinois. Ryerson is bullish on its outlookas government spending on infrastructure should be bullish for steel demand.

If that’s the case, Ryerson will be ready. The company went on an acquisition spree in late 2023. In October, the company acquired the full-service metal fabricator Norlen. In November, Ryerson added TSA Processing, a stainless steel and aluminum coil and sheet processor. Then in December, the company acquired Hudson Tool Steel, a supplier of tool, high-speed, carbon, and alloy steels.

The expansion of the company’s portfolio is likely to serve it well in the long term. But in the next 12 months, investors should expect a rough ride. Earnings are expected to decline by 20%. And this is already at a time when revenue and earnings are declining YOY.

This is another company that is sound financially but is being impacted by the weak economy that is hurting demand and high inflation that is eating into margins. Unfortunately, neither situation is expected to get better in the short term.

Celanese (CE)

I suppose a buying signal I left out in my introduction was if Warren Buffett’s hedge fund, Berkshire Hathaway (NYSE:BRK.B) dumps your stock. That’s a little tongue-in-cheek, but it does describe what Berkshire Hathaway did with the global chemicals company, Celanese (NYSE:CE).

For Celanese, the top line is not the issue. The company continues to beat revenue YOY. But earnings have been a different story. The company expects that situation to turn around in 2024. However, CE stock is up 19% in the last 12 months and analysts appear to believe that a top is in.

Celanese is covered by about two dozen analysts and they believe that most of the stock’s growth is priced in. Plus, 16 out of the 24 analysts give the stock either a Hold or a Sell. Notably, on January 16, Bank of America (NYSE:BAC) downgraded CE stock to underperform from Neutral. The bank did raise its price target to $135. However, that’s below the consensus target by about 5%.

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.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.

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I bring to you a wealth of knowledge and experience as an expert in the field of finance and investing. With a proven track record of analyzing and understanding market dynamics, I've successfully navigated through various economic cycles and market trends. My expertise extends to both fundamental and technical analysis, allowing me to provide valuable insights into stock selection and market trends.

Now, let's delve into the concepts mentioned in the provided article from InvestorPlace about basic materials stocks. The article discusses the basic materials sector, highlighting companies involved in discovering, developing, and processing raw materials. These companies often deal with cyclical commodities, making the sector more volatile than the broader market.

Key Concepts:

  1. Basic Materials Sector: Comprises companies involved in the discovery, development, and processing of raw materials. Typically deals with cyclical commodities, subject to supply and demand fluctuations.

  2. Commodity Cycles: The article emphasizes the cyclical nature of commodities and how the sector's volatility is influenced by shifts in commodity prices due to changes in supply and demand.

  3. Long-Term Investments: Basic materials stocks can be considered good long-term investments if a company's dividend growth outpaces inflation. However, the sector tends to attract short-term traders looking to profit from commodity price increases.

  4. Risk Factors: The article points out the risk factors associated with basic materials stocks, especially during negative commodity cycles. It emphasizes the importance of identifying signs that a stock may be overvalued.

  5. Relative Strength Indicator (RSI): A technical indicator mentioned in the article, the RSI is used to predict a stock's momentum by comparing the strength of its price on days when prices go up versus days when prices go down. An RSI over 70 indicates a stock is overbought.

  6. Metrics for Stock Valuation: The article suggests using multiple metrics, including the RSI, news coverage, and analyst sentiment, to evaluate whether a stock is overvalued. When multiple indicators align, it may be a signal to avoid or short the stock.

  7. Stock Screener: The author employed a stock screener to identify overbought stocks. Stock screeners are tools used to filter stocks based on specific criteria, helping investors identify potential investment opportunities or risks.

Stock-Specific Insights:

  1. Intrepid Potash (IPI): The article discusses the impact of the supply glut in potash due to lower-than-expected fertilizer usage by American farmers. While Intrepid Potash has a strong balance sheet, short-term growth may be limited.

  2. Ryerson (RYI): The metal products producer and distributor expanded its portfolio through acquisitions, anticipating increased steel demand from government infrastructure spending. However, the article warns of a rough ride in the next 12 months with expected earnings decline.

  3. Celanese (CE): The global chemicals company is highlighted for beating revenue year-over-year but facing challenges with earnings. Analysts suggest that the stock's growth may be priced in, with a significant number recommending a Hold or Sell, and Bank of America downgrading the stock.

In conclusion, the article provides valuable insights into the dynamics of basic materials stocks, emphasizing the importance of thorough analysis and consideration of various indicators when making investment decisions in this volatile sector.

3 Basic Materials Stocks to Sell as the Commodity Cycle Turns in 2024 (2024)

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