Best Stocks to Buy in May 2024: TSX Materials Sector

Written by Brian Paradza, CFA at The Motley Fool Canada

Canadian materials sector stocks are rising in 2024. The S&P/TSX Composite Index Metals & Mining (Industry) Index is up 21.8% year to date as the TSX materials sector significantly outperformed the TSX Composite’s 5.9% gain so far this year. Investors looking for the best materials stocks to buy could gain exposure through a sector index exchange-traded fund (ETF), or take a closer look into greening stocks like Teck Resources (TSX:TECK.B) or an undervalued copper miner Ero Copper (TSX:ERO) today.

Why are Canadian materials sector stocks rising?

Canadian materials sector stocks have risen in 2024 as gold prices – which reached record highs – and copper prices soared, and the commodities market remained resilient. Global demand for materials like copper and aluminum has risen with sustained construction growth and firm copper demand in electrification projects. Industries and governments are investing heavily in copper-hungry green energy solutions.

Rumours of potential copper shortages are spreading through markets, sending copper futures 22.6% high year to date. Gold is up 13.3% and aluminum prices have clocked double-digit gains so far this year, and producers (materials and mining stocks) may benefit from revenue growth and earnings margin expansions this year.

Best materials stocks to buy: The iShares S&P/TSX Capped Materials Index ETF

Investors with limited time to research individual stocks to buy to gain exposure to the Canadian materials sector could simply buy a materials index ETF and gain diversified broad sector exposure in one go.

The iShares S&P/TSX Capped Materials Index ETF (TSX:XMA) has gained 19.8% so far this year. The low-cost ETF tracks the performance of the S&P/TSX Capped Materials Index, a diversified gauge of the materials sector stocks within the TSX Composite Index. Investors could use the ETF to express their bullish views on the materials sector, without concentrating their capital on a few tickers. The ETF offers diversification benefits across 50 portfolio holdings in a single investment.

Managed by Blackrock (NYSE:BLK), one of the largest ETF fund managers globally, the XMA ETF’s $172 million portfolio provides 55.5% exposure to gold stocks, 12.7% exposure to diversified metals and mining stocks, and 10.3% exposure to fertilizers and agricultural chemicals producers while copper stocks and silver stocks comprise 8% and 4.4% of the portfolio’s weights. The portfolio’s biggest holdings include Agnico Eagle Mines comprising 11.7% of the portfolio, Barrick Gold (10.4%), Nutrien (10.3%), Wheaton Precious Metals (8.8%), Franco Nevada Corp (8.2%), and Teck Resources stock at 8.1%.

The low-cost materials sector index ETF offers cheap exposure to a professionally managed portfolio. It has a management expense ratio (MER) of 0.61%, meaning investors will pay as little as $6.10 per year in management fees and expenses for every $1,000 invested in the ETF.

That said, the materials sector is broad and highly volatile. Stock investors with more refined opinions may wish to avoid expected poor performers in an attempt to outperform the materials index.

Teck Resources stock: Going green with a copper upside

Teck Resources stock has gained 25% in value year to date and more than doubled during the past three years with a 163% return. The company recently disposed of oils ands assets, and its planned disposal of metallurgical coal assets provides ample liquidity to invest in copper assets and repurchase stock.

Copper and zinc are the company’s future revenue and earnings drivers. Copper production increased 74% year over year last quarter and zinc concentrate production was up 10% during the first quarter of 2024. Teck Resources has pivoted away from metallurgical coal to green its operations and could gain some ESG valuation points.

Ero Copper: An organic growth-focused materials sector stock to hold

Ero Copper is a $3.2 billion base metals producer with copper mining assets in Brazil. The miner sells gold and silver as bi-products. ERO stock has gained 48.4% in value so far this year, and could rise some more as plans to earn a 60% interest in Vale Base Metals’ Furnas copper project come to fruition. The plan could double its copper production.

Bay Street analysts project potential 51% sales growth for Ero Copper over the next year. The company maintains a strong balance sheet. It focuses on organically funded growth, which minimizes shareholder dilution.

Ero Copper stock appears too cheap to ignore with a forward price-to-earnings multiple of 6.6 in an industry with an average PE of 107. A forward price-earnings-to-growth (PEG) ratio of 0.2 implies ERO stock is grossly undervalued given its potential earnings growth potential over the long term.

The post Best Stocks to Buy in May 2024: TSX Materials Sector appeared first on The Motley Fool Canada.

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Fool contributor Brian Paradza has no position in any of the stocks mentioned. The Motley Fool recommends Nutrien. The Motley Fool has a disclosure policy.

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Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded MiningNerds.com to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

By Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded MiningNerds.com to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

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