The basic materials sector features companies 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)
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 (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 outlook as 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.
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.