Investment strategies can significantly impact financial outcomes, and recent insights from market analysts suggest a strategic pivot for investors. In a recent analysis, renowned investor Eric Fry emphasized the importance of selecting stocks that are likely to outperform while avoiding those that are poised to decline. His recommendations focus on companies within the basic materials sector, underscoring the potential for growth amid shifting market dynamics.
Fry’s approach draws on the concept of bond ratings, which provide an objective view of a company’s financial health. For instance, of the 376 S&P 500 companies rated by Moody’s in 2020, those with the highest ratings — categorized as Prime-1 (Aaa through A3) — saw an impressive return of 74.7%. In contrast, companies rated as “Not Prime” (Ba1 and lower) yielded a modest 52.2%. This data suggests that avoiding lower-rated firms could lead to better returns with reduced risk.
Stocks to Buy: Tronox and Albemarle
When considering stocks to buy, Fry highlights Tronox Holdings PLC (TROX) as a compelling option. As one of the leading producers of titanium dioxide (TiO2), a key ingredient in various consumer products, Tronox’s shares are currently trading at under $4. This is significantly lower than their historical range of $15 to $20. Despite concerns about demand fluctuations, the need for TiO2 remains robust, especially as industries continue to require the compound for paints, plastics, and coatings.
Recent insider buying activity at Tronox adds to the optimism surrounding its potential recovery. Notably, members of the Board of Directors purchased a total of 70,000 shares between August 5 and August 13, with the CEO alone acquiring 100,000 shares on August 1. Fry estimates that shares could recover threefold within the next two to three years if demand stabilizes.
Another company recommended by Fry is Albemarle Corp. (ALB), which has already seen a notable gain of 23% in recent months. The company is well-positioned to benefit from the ongoing demand for lithium-ion batteries and hydrogen fuel cells, driven by advancements in AI and robotics. A recent production halt by China’s largest battery maker, Contemporary Amperex Technology Co. Ltd. (CATL), has further fueled a lithium price rally, climbing by 30% since late June. Albemarle’s strong balance sheet and low-cost assets in Chile make it a favorable investment in this evolving landscape.
Stock to Avoid: Alliance Resource Partners
Conversely, Fry advises investors to steer clear of Alliance Resource Partners LP (ARLP), the second-largest coal producer in the United States. The coal industry, particularly in the Eastern U.S., faces significant challenges due to diminishing resources and rising operational costs. Alliance operates in high-cost regions where the lowest-quality coal has already been extracted, with a projected decrease in earnings per share of 20% this year following a 40% decline last year.
Analysts from the Institute for Energy Economics and Financial Analysis noted that the Illinois Basin, where Alliance operates, is losing competitiveness against cheaper alternatives from the Powder River Basin. This trend is further exacerbated by the increasing shift towards natural gas, which offers lower extraction costs. Given these factors, Fry cautions that investors should not expect a turnaround for Alliance Resource Partners.
As the markets evolve, Fry’s recommendations for Tronox and Albemarle reflect an understanding of the shifting dynamics within the basic materials sector. Investors seeking to navigate these changes may find value in aligning their portfolios with companies positioned for growth while remaining vigilant against those facing structural challenges. For those interested in further insights, Fry’s latest presentation includes additional stock recommendations aimed at maximizing potential returns in today’s make-or-break markets.
