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We recently compiled a list of 10 Best Basic Materials Stocks To Buy Now. In this article, we will look at where Air Products and Chemicals, Inc. (NYSE:APD) 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)
Air Products and Chemicals, Inc. (NYSE:APD)
Number of Hedge Fund Investors: 47
Market Capitalization as of October 10, 2024: $69.80 billion
Air Products and Chemicals, Inc. (NYSE:APD) was established in 1940 and now employs 19,000 people worldwide. It is one of the world’s top providers of industrial gas. The company is the world’s biggest provider of helium and hydrogen. Serving clients in many areas such as chemicals, energy, healthcare, metals, and electronics, it has a distinctive portfolio. In fiscal 2023, the company brought in $12.6 billion in revenue.
Air Products enjoys the advantages of operating in a highly advantageous industry. Public industrial gas companies have continuously produced profitable returns despite selling industrial gases, which are essentially commodities, due to their economic moats. Although they usually make up a very minor portion of customers’ expenses, industrial gases are an essential component to maintaining production. Customers will therefore frequently sign long-term contracts and pay a premium to guarantee the seamless operation of their company. The moats of industrial gas producers are strengthened by long-term contracts and high switching costs, which enable them to provide profitable returns and a consistent cash flow stream.
The London Company Large Cap Strategy stated the following regarding Air Products and Chemicals, Inc. (NYSE:APD) in its Q2 2024 investor letter:
“Air Products and Chemicals, Inc. (NYSE:APD) – We added to our position in APD this year and the stock subsequently outperformed during 2Q. APD continually posts results for its base business comparable to that of its closest industrial gas peers, and margins have recovered back towards industry-leading levels. We believe the offtake announcement in June between APD and Total Energies for 30% of NEOM’s green hydrogen output is a good first step towards alleviating investor concerns about the return profile for clean energy megaprojects. Added to the position following recent weakness in the shares. We believe the competitive advantages are intact and valuation is attractive.”
Laurence Alexander, a Jefferies analyst, raised his price objective for Air Products from $295 to $364, indicating a buy recommendation. Mantle Ridge has amassed a more than $1 billion stake in Air Products and plans to push for improvements at the company, according to a report by Lauren Thomas of The Wall Street Journal on Friday. The firm argues that an activist takeover would allow Air Products to reframe its story as one of “quality growth” and, for a while at least, link shareholder returns to company initiatives rather than changes in policy or commodity prices. The analyst informs investors that a route to $364 per share, or 27% upside, is supported by pinning near-term prices to Linde on a sum-of-the-parts basis and the potential to unlock earnings.
The $30 billion capital allocation plan of Air Products is driven by business possibilities that position the company for rapid expansion.
Ken Griffin’s Citadel Investment Group is the largest stakeholder in the company from among the funds in Insider Monkey’s database. It owns 309,026 shares worth $79.74 million as of Q2.
Overall APD ranks 8th on our list of the best basic material stocks to buy now. While we acknowledge the potential of APD 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 APD 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.