Everything's made out of something.
Legos are made out of plastic. Plastic is made out of oil. Oil is made out of dead dinosaurs. And even when you can't invest in a company -- The Lego Group, for example, is privately held -- you can often invest in companies making the materials that go into your favorite products.
Three materials companies, in particular, have proven to be surprisingly resilient during the current economic turmoil: Dow (DOW), Nucor (NUE -0.26%), and Darling Ingredients (DAR -1.30%).
Here's why I'd buy these three stocks, and why you might want to as well.
Image source: Getty Images.
1. Dow: Making chemicals critical in a number of industries
Dow is a big name in the chemical industry. Founded more than a century ago, it once offered a broad range of chemical products. In 2005, after both Dow and rival DuPont had been underperforming, they merged into an even bigger D, DowDuPont, before spinning off the "performance chemicals" portfolios of both companies as a new, more streamlined Dow.
Basically, Dow produces chemicals that aren't products by themselves but are components in other processes or items, such as coatings, lubricants, adhesives, paints, and packaging. The good news for Dow is that its chemicals are critical to a number of industries, like manufacturing, healthcare, and tech, so the company churns out a reliable revenue stream. It even managed to generate a healthy $1.6 billion in operating cash flow during the second quarter of 2020, at the height of the global coronavirus pandemic.
The markets for these chemicals are fairly well-established, so rapid growth probably isn't in the cards for Dow. That's OK, though, because the company is currently sporting a 6.8% dividend yield, backed up by its diversified and reliable revenue stream. Dow looks like an excellent pick for value or dividend investors.
2. Nucor: Solid as steel
Steel is used in everything from automobiles to military equipment to construction, and steel manufacturer Nucor is a standout performer in the industry.
Nucor made history in 1968 by using an electric arc furnace to melt scrap steel into usable bars. The process it developed was much cheaper than traditional blast furnace production, and Nucor has since this development and others to help it grow into the largest steelmaker in the U.S. The company's shares are down more than 25% so far in 2020 over concerns that steel demand would plummet due to the pandemic, a U.S. recession, and U.S.-China trade disputes. However, the steel market has proven unexpectedly resilient. Even Nucor's management was surprised: Q2 2020 earnings came in at nearly double the top end of the company's guidance.
Nucor currently offers a 3.8% dividend yield, and with share prices lower than at any point since 2016, it looks like a good time to snap up some of this steelmaker's stock.
3. Darling Ingredients: Same process, just yuckier
Nucor takes scrap steel, melts it down, and turns it into something useful. Darling Ingredients does something very similar, just with animal proteins and fats.
It collects scrap and waste materials from restaurant grease traps and deep fryers, bakeries, farms, and slaughterhouses, and processes them into organic products like gelatin, tallow, grease, and fertilizer. The company also has a small (but growing) biofuels business, Diamond Green Diesel, which it operates jointly with refiner Valero.
Wall Street had low expectations for Darling in the first quarter of 2020, as many restaurants -- one of its main sources of raw material -- shut their doors across the U.S. However, Darling surprised the market with better-than-anticipated performance. Both revenue and per-share earnings were up from Q1 2019.
In spite of that, Darling's share price is still down for the year. It may be that the market is worried about the potential for continuing restaurant closures or state-mandated shutdowns. That's certainly possible, but a near-nationwide shutdown of the magnitude we saw in April or May, when more than 90% of the U.S. population was under stay-at-home or similar orders, currently seems unlikely.
Darling reports Q2 2020 earnings on Aug. 6, and interested investors may want to buy in before another potential upside surprise. Darling is currently trading at just 12.4 times earnings, practically an all-time low, so now might be the time to pick up shares.
Why buy
A lot of investors are worried about a "double-dip" recession that will make today's prices -- even for reasonably priced materials companies like Dow, Nucor, and Darling Ingredients -- look sky-high in hindsight. That's certainly possible. But it's also possible that the market will continue to ignore dismal economic news and keep on going up.
The best thing for investors to do is to regularly buy companies that look like good values. If the market tumbles and they get even cheaper, you can always buy more. The financials for these three companies suggest they are solid picks right now.
