- 1Materials stocks are cyclical, tracking global industrial production and commodity prices
- 2Specialty chemicals offer higher margins and better moats than commodity chemicals
- 3Capital discipline and cost positioning determine long-term winners
- 4Our model's value and profitability factors help navigate cyclicality
#The Materials Sector
Materials companies produce the raw inputs for the global economy: chemicals, metals, construction materials, packaging, and forest products. The sector is inherently cyclical — demand and pricing depend on industrial activity levels.
Sub-Sectors
| Sub-Sector | Cyclicality | Moat Source | Examples |
|---|---|---|---|
| Specialty Chemicals | Moderate | Formulation expertise, switching costs | Linde, Air Products, Sherwin-Williams |
| Commodity Chemicals | High | Scale, cost position | Dow, LyondellBasell |
| Mining (Gold) | Moderate | Reserve quality, cost per ounce | Newmont, Barrick Gold |
| Mining (Diversified) | High | Resource access, scale | Freeport-McMoRan |
| Steel | Very High | Cost position, integration | Nucor, Steel Dynamics |
| Packaging | Low-Moderate | Customer contracts, switching costs | Ball Corp, Packaging Corp |
| Construction Materials | Moderate | Local monopolies, permitting barriers | Vulcan Materials, Martin Marietta |
#Key Metrics
| Metric | Why It Matters | Strong Signal |
|---|---|---|
| EBITDA Margins | Operational efficiency | > 20% for specialty, > 15% for commodity |
| Return on Capital | Capital allocation quality | > 12% through-cycle |
| Debt/EBITDA | Leverage in cyclical industry | < 2.0x |
| Cost Position | Commodity producer competitiveness | Bottom quartile of cost curve |
| Volume Growth | Demand trend | Positive organic volume |
#How Our Model Works for Materials
Value
Materials stocks frequently appear cheap on traditional metrics, especially during commodity downturns. Our multi-factor approach prevents buying cheap-but-deteriorating companies by combining value with profitability and momentum.
Profitability
Specialty chemicals companies with unique products and high switching costs generate strong, stable margins. These companies score well on profitability regardless of the commodity cycle.
Momentum
Commodity cycles create powerful momentum swings. Rising commodity prices lift all boats, but our model identifies which materials stocks have the strongest fundamental momentum — not just commodity price exposure.
#Portfolio Role
Materials stocks serve specific portfolio functions:
- Inflation hedge — Commodity producers benefit directly from rising prices
- Global growth exposure — Demand tracks industrial production worldwide
- Cyclical diversification — Low correlation with defensive sectors
The key is sizing appropriately. Materials typically warrant a 3-7% portfolio allocation.
Last updated: February 10, 2026