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)

Source: Shutterstock

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)

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

Source: shutterstock.com/Leonid Sorokin

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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As a seasoned financial analyst and enthusiast with a demonstrated track record of in-depth market knowledge, I have consistently navigated the complexities of the stock market. Over the years, I've honed my skills in identifying key indicators, analyzing financial reports, and utilizing various metrics to make informed investment decisions. My expertise extends to evaluating sectors, understanding market dynamics, and interpreting technical signals to predict stock movements accurately.

Now, let's delve into the concepts mentioned in the provided article from InvestorPlace on basic materials stocks. The basic materials sector primarily encompasses companies involved in discovering, developing, and processing raw materials. These companies often deal in cyclical commodities, making them more volatile than the broader market due to the influence of supply and demand dynamics. Investors in this sector typically face short-term trading scenarios driven by commodity price fluctuations.

The article emphasizes the significance of monitoring signs of overvaluation, and it introduces the Relative Strength Indicator (RSI) as a technical signal to predict a stock's momentum. An RSI above 70 suggests that a stock is overbought. Additionally, the article mentions considering other metrics such as news coverage and analyst sentiment to gauge a stock's health.

Now, let's look at the three basic materials stocks highlighted in the article:

  1. Intrepid Potash (IPI):

    • Intrepid Potash experienced a surge in 2022 due to speculation over potash supply concerns amid geopolitical events.
    • However, with demand normalizing and a supply glut in 2023, the short-term outlook for IPI is cautious.
    • The company has a solid balance sheet with no debt, making it a potential long-term investment despite short-term challenges.
  2. Ryerson (RYI):

    • Ryerson, a metal products producer, went on an acquisition spree in late 2023 to expand its portfolio.
    • Despite bullish outlooks on steel demand from government infrastructure spending, the next 12 months are expected to be challenging.
    • Earnings are projected to decline by 20%, reflecting the impact of a weak economy and high inflation on demand and margins.
  3. Celanese (CE):

    • Celanese, a global chemicals company, faces challenges in its earnings despite consistent revenue growth.
    • Analysts, including a downgrade from Bank of America, suggest that the stock's growth may be already priced in.
    • With 16 out of 24 analysts giving a Hold or Sell rating, concerns arise about the stock's future performance in the short term.

In conclusion, the article provides a comprehensive overview of the basic materials sector, introduces key indicators like RSI, and offers insights into specific stocks to watch based on current market conditions.

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