We recently compiled a list of the 11 Best Materials Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where The Sherwin-Williams Company (NYSE:SHW) stands against the other material stocks.
Materials stocks are those companies that produce chemicals, construction materials, and paper products. Businesses involved in the exploration and processing of commodities are also included in this sector.
Materials demand is cyclical, rendering sector players extremely vulnerable to economic fluctuations. The demand for basic materials tends to drop when economic conditions deteriorate, which lowers prices and impacts the profitability of material producers. However, the materials sector can be impacted by a variety of factors, including the economic cycle. Supply chain challenges, legislation, and inflation are just a few of the many factors that could impact demand, prices, and industry profitability in the materials industry.
After Russia invaded Ukraine in 2022, a new challenge arose in the industry. The region provides essential metals for steel production and exports minerals for fertilizer, such as potash; therefore, the war caused disruptions in the worldwide supply chain for resources. Most basic materials’ costs increased due to supply constraints, which had a significant impact on both the industry and the overall economy.
Looking forward, a cautiously positive view for the materials sector in 2025 has been strengthened by long-term structural demand and improved macroeconomic conditions. Persistent economic concerns in the United States and a noticeable slowdown in China, two important markets for industrial materials, burdened the sector in 2024. However, according to Fidelity, the situation seems more favorable for growth in 2025 as China implements economic stimulus measures and central banks in major economies currently lean toward monetary easing. Some subsectors stand to benefit from both a short-term cyclical recovery and advantageous long-term supply-demand imbalances, especially those related to copper and other crucial inputs for infrastructure and electrification. Furthermore, the sector’s rate-sensitive industries, such as chemicals, may gain from lower interest rates, while more robust, high-quality firms may provide defensive strength. The sector is positioned for a potentially better performance in 2025 due to a combination of financial assistance, a possible recovery in Chinese demand, and strategic exposure to growth-linked materials.
Currently, according to a strategist for equity derivatives at Barclays, Stefano Pascale, options traders are undervaluing the risks associated with materials stocks because the sector’s predicted volatility is close to historic lows, making downside protection cheap. Steel and paper companies are among the materials stocks that are susceptible to tariffs because of their dependence on international supply chains, and additional tariffs are anticipated to be announced soon by President Trump.
Despite this, Pascale commented:
“The volatility market is giving you an exceptionally good opportunity here of cheap materials puts. Even if you didn’t have a trade war, this would be, historically speaking, a very attractive trade.”
Materials underperformed in 2018 due to Trump’s tariffs, and similar drops may be seen this year, with the Dow down 7%. According to statistics provided by Bloomberg Intelligence, sell-side analysts have lowered their expectations for the material sector, anticipating earnings to climb 5.9% this year, down from an estimate of 16% in January. However, traders must consider liquidity risks, as the bid-ask spread for materials options is $0.20, as opposed to $0.04 for broader market options.
Methodology
We sifted through the Materials ETFs and online rankings to form an initial list of the 25 materials stocks. From the resultant dataset, we chose 11 stocks with the highest number of hedge fund investors, using Insider Monkey’s database of 1009 hedge funds in Q4 2024 to gauge hedge fund sentiment for stocks.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
A close-up of a vibrant paint color being sprayed onto a wooden surface.
The Sherwin-Williams Company (NYSE:SHW)
Number of Hedge Fund Holders: 74
In the US, The Sherwin-Williams Company (NYSE:SHW) is the biggest supplier of architectural paint. The company sells higher-quality paint at higher prices than most of its rivals, and it has more than 5,000 stores. The firm also supplies coatings for original equipment manufacturers and distributes its goods at big-box retailers. Over three-quarters of its operations take place in North America, and the 2016 acquisition of Valspar gave it significant worldwide exposure. Since Valspar’s long-standing relationship with Lowe’s resulted in an exclusive collaboration for the company in 2018, the acquisition has strengthened its previously limited retail footprint. Moreover, it expanded its performance coatings section by acquiring Valspar’s industrial business. The stock surged by over 8% in the last year, making it on our list of the best material stocks.
The Sherwin-Williams Company (NYSE:SHW) reported $5.3 billion in revenue for the fourth quarter of 2024, a 1% rise over the same time the previous year. Price changes and increasing demand for new residential construction and repainting projects drove an uptick of 3.4% in net sales for the company’s Paint Stores Group to $3.04 billion. The segment’s profit surged 6.9% to $606.4 million due to effective pricing measures.
In 2025, the management anticipates that adjusted EPS will be between $11.65 and $12.05. Diluted net income per share will be between $10.70 and $11.10. The Sherwin-Williams Company (NYSE:SHW) maintains its optimism despite acknowledging potential demand issues, concentrating on growing its market share, and using technology to aid in expansion.
Overall, SHW ranks 3rd on our list of the best materials stocks to buy according to hedge funds. While we acknowledge the potential of SHW as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. There is an AI stock that went up since the beginning of 2025, while popular AI stocks lost around 25%. If you are looking for an AI stock that is more promising than SHW but that trades at less than 5 times its earnings, check out our report about this cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.