By Jacob Sonenshine

The materials sector has gotten hit particularly hard in the past couple months for a host of economic reasons. But if you look closely you can find a few companies that are resilient to formidable headwinds, making their stocks look like buys.

The Materials Select Sector SPDR exchange-traded fund has dropped 14% since hitting a record in October. The worries are rooted in macroeconomic issues: Global economic growth has slowed down, hurting sales for makers of chemicals, metal products, and paints, while the Federal Reserve may keep interest rates higher for a while, further weighing on consumer and business demand. Plus, President-elect Donald Trump could enact tariffs on certain goods, which would reduce U.S. demand for some products and the basic materials that go into them.

On top of that, the recent rise in interest rates -- a response to the market's expectation of too much inflation -- has caused the U.S. dollar to rise. That reduces sales and earnings figures for the many U.S. materials makers that sell overseas because a stronger buck reduces revenue in U.S. dollar terms.

The good news is that much of the bad news is already reflected in the stocks now -- and there are plenty of positive points that can bring some of them higher. But investors still want to protect themselves against the risk of the unknown. Question marks include just how much the economy will slow down and what the tariff picture will look like. That's why they should pick up stock in companies that are making their own specific changes or that are relatively insulated from some of these headwinds.

One is $31 billion chemical maker DuPont de Nemours. The company is planning to spin off its water and electronics businesses, leaving the remaining piece of the company as DuPont. The company indicated that it will complete the split some time late this year or in early 2026. With greater visibility into each segments' financials, the market would likely value them more richly.

The stock currently trades at $74, but Mizuho analyst John Roberts writes that the sum of the parts in the spinoff would be at least $100.

DuPont's electronics business, which sells materials to chip makers and is rising with some of the growth of artificial intelligence chips, should trade at 22 times next year's earnings, Roberts says, similar to the above 25 times for Entegris, a materials supplier for chip makers. DuPont implied in its press release in May that earnings before interest, tax, depreciation, and amortization was over $1 billion, a figure that could be higher now. The standalone company could be worth well more than $10 billion.

The water business, which provides chemicals for water treatment across many industries, could be valued at 20 times earnings, while the remaining company could trades at 12.5 times. Stock for the entire company currently trades at just over 16 times, but that likely doesn't reflect the full value of the different businesses. Shares could easily pop once the company completes the spinoff.

Linde is another stock to consider. The $199 billion industrial-gas maker sees the majority of its sales come from overseas, so it would experience less pain as a result of tariffs on goods coming into the U.S. True, a further rise in the dollar would hurt, but the dollar has already gained a lot, and if interest rates don't continue to rise, the dollar will stop surging.

Linde is also highly diversified, serving customers across sectors, an advantage because, when a given industry might happen to buy fewer chemicals, another might increase its purchases. For instance, it sells to companies in the healthcare and food-and-beverage spaces, which often carry more stable demand in contrast to segments such as energy and manufacturing.

Analysts' expected sales of about $33.3 billion this year would be up almost 2% year over year, marking the second consecutive year of growth for Linde, even as smaller peer Air Products & Chemicals saw sales decline this year.

Linde is one of three major global chemical companies. Its size and relationships with customers help it enjoy pricing power, enabling it to grow sales and return some of its more than $5 billion in annual free cash flow to shareholders through stock buybacks, which further boost earnings per share.

"LIN's defensiveness and consistency in growing EPS has continued to grow," writes Roberts, who has a $530 price target, representing 27% upside from the current $418.

Give these stocks a look.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 08, 2025 14:40 ET (19:40 GMT)

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