Steel Dynamics, Dow among top materials picks ahead of Q1 earnings; Albemarle gets a Sell

With first quarter earnings season around the corner, let’s take a closer look at how the materials sector performed in the past three months, amid high interest rates and rising commodity prices.

The S&P 500’s materials sector (NYSEARCA:XLB), which has a 2.4% weightage on the S&P 500, gained about 8.8% in the January-March period, underperforming the overall market's 10.8% upswing. That compares to a 3.9% growth in the overall materials sector in the same period a year-ago.

According to Seeking Alpha's Quant Rating system, the S&P 500 Materials sector, which includes some of the big names, including Linde (LIN), Sherwin-Williams Company (SHW), Freeport-McMoRan (FCX), Air Products and Chemicals (APD), and Newmont (NEM), has an average health score of 3.17.

The Quant Rating system assigns grades according to quantitative measures, like valuation, earnings growth, and recent stock performance, with the highest possible score of 5.

Looking into individual companies in the sector, Steel Dynamics (STLD), Dow (DOW), Celanese (CE) and Eastman Chemical (EMN) top quant rating chart.

Steel Dynamics (STLD) is also the only company with a “Strong Buy” rating and a score of 4.75, faring well in profitability, revisions and moment. The U.S.-based steel producer and metal recycler, however, did not fare well in valuation.

The company was also recently listed under “buying opportunities” by Oppenheimer. Year-to-date, the stock has gained about 24%, with the company also issuing an upside first-quarter earnings guidance due to increased shipments, while also raising its quarterly dividend by 8%.

Chemicals maker Dow (DOW) ranked second in SA Quant Ratings, with a score of 4 out of 5. The stock has an A grade for profitability and A- for valuation. Last month, Dow said it plans to invest in new ethylene derivatives capacity on the U.S. Gulf Coast to serve rising demand in the domestic electric vehicle and energy storage markets.

Chemical manufacturer FMC Corp (FMC), and the world's largest lithium producer, Albemarle (ALB), are the only two companies in the pack with a ‘Sell’ rating, with each earning a Quant score of 1.96 and 1.84, respectively.

Leo Nelissen, a buy-side financial markets analyst, in a recent article stated that, while EPS expectations have been revised downward, Albemarle's (ALB) current valuation presents an opportunity for investors. "Considering the challenges in the EV industry, mining companies like ALB offer a compelling risk/reward profile amidst increasing competition among car manufacturers."

Assuming the Fed cuts its policy rate over the coming months, investors will keep a close watch on companies' views on the economy, inflation and growth predictions.