Five Basic Industries Stocks Smart Money Like

With the bull market still roaring in its seventh year, Insider Monkey has put together a list of basic materials stocks that the smart money likes.

Although they are not exactly high-tech, basic material companies play an integral part in the U.S. and global economy. As the U.S. and world economies gain strength, so should basic material companies’ profits. In this article, we examine five of the smart money’s favorites among the sector, including Monsanto Company (NYSE:MON), Air Products & Chemicals, Inc. (NYSE:APD), Barrick Gold Corporation (USA) (NYSE:ABX), Dow Chemical Co (NYSE:DOW), and W. R. Grace & Co (NYSE:GRA).

At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on, can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see the details here).

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#5 W. R. Grace & Co (NYSE:GRA)

– Number of Hedge Fund Holders (as of June 30): 47
– Total Value of Hedge Fund Holdings (as of June 30): $1.48 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 28.60%

W. R. Grace & Co (NYSE:GRA) reported mixed results for its second quarter. Although the company’s profits of $0.74 per share came in $0.07 per share ahead of analysts’ estimates, W.R. Grace’s revenue of $390.5 million missed the expectations by $16.86 million. However, the second half looks better, as W. R. Grace’s management expects accelerated volume growth and more robust business overall. For the full year, the management sees adjusted EPS in the range of $3.05 to $3.10 and adjusted EBITDA in the range of $500 million to $505 million. In terms of hedge fund activity, the number of investors tracked by us long the stock rose by one to 47 at the end of June. The largest shareholder, David Cohen and Harold Levy‘s Iridian Asset Management, trimmed its holding by 18% quarter-over-quarter to just under 4.5 million shares.

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#4 Dow Chemical Co (NYSE:DOW)

– Number of Hedge Fund Holders (as of June 30): 48
– Total Value of Hedge Fund Holdings (as of June 30): $2.54 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 4.50%

Hedge funds like Dow Chemical Co (NYSE:DOW) due to the potential synergies it will unlock from the potential merger with fellow chemical giant E I Du Pont De Nemours And Co (NYSE:DD). Dow’s management estimates that the merger will yield $3 billion in cost synergies achievable within the first 24 months and potentially $1 billion more in growth synergies further down the road. Once the synergies are realized, management intends to separate DowDuPont into three independently-traded companies through tax-free spin-offs. The three companies, a leading global Material Science company, a leading global Agriculture company, and a leading innovation-driven Specialty Products company, will be more focused and will deliver more value to shareholders.

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#3 Barrick Gold Corporation (USA) (NYSE:ABX)

– Number of Hedge Fund Holders (as of June 30): 53
– Total Value of Hedge Fund Holdings (as of June 30): $3.84 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 15.40%

Given that gold stocks have been red-hot in 2016, it’s not surprising that 53 top funds (up by four funds from the previous quarter) owned Barrick Gold Corporation (USA) (NYSE:ABX) at the end of the second quarter. With a forward P/E of 18.54, the stock isn’t expensive and Barrick has substantial upside left if gold prices continue trending higher. Any combination of global recession, major geopolitical event, or negative outcome resulting from Britain’s decision to leave the EU could cause many investors to allocate more of their portfolios towards gold. Higher gold prices would in turn translate to greater profits for Barrick. Shares of the company could face headwinds, however, if gold sells off due to the coming interest rate hikes.

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#2 Air Products & Chemicals, Inc. (NYSE:APD)

– Number of Hedge Fund Holders (as of June 30): 56
– Total Value of Hedge Fund Holdings (as of June 30): $5.01 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 16.30%

With a stake of 7.6 million shares, Air Products & Chemicals, Inc. (NYSE:APD) is Bill Ackman’s Pershing Square’s third-largest position, accounting for 14.37% of Pershing’s equity portfolio. Given Air Products & Chemicals’ rock-solid cash flows and diversified exposure to the global economy, it’s not surprising that Ackman would like the stock. Air Products shares have done very well, advancing by 20% year-to-date, and could rise more if the Chinese economy and/or energy prices recover. Air Products’ upcoming spin-off of its materials business could also prove as an additional upside catalyst.

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#1 Monsanto Company (NYSE:MON)

– Number of Hedge Fund Holders (as of June 30): 87
– Total Value of Hedge Fund Holdings (as of June 30): $5.32 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 11.80%

With 87 funds from our database owning shares in the company at the end of the second quarter, up by 36 from the previous quarter, Monsanto Company (NYSE:MON) is the smart money’s top basic materials pick on our list. Despite Monsanto’s previous rejections, many hedge funds expect German company Bayer to buy Monsanto due to the potential synergies from the merger. According to Bloomberg, Bayer and Monsanto’s CEOs have engaged in constructive talks over a potential merger and the two companies could reach a deal by September 6. If the merger doesn’t materialize, Monsanto still has a promising future, given the increasingly affluent global population.

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Disclosure: none