A material (stock) difference

10/17/19
  • S&P construction materials industry up more than 50% this year
  • MLM and VMC recently pulled back from record highs
  • Stocks viewed by some as resistant to trade wars, recession

Although the materials sector is the third-weakest area of the S&P 500 (SPX) so far this year (up around 14%), don’t blame the construction materials sub-sector, which is up a whopping 51.5%.

Two good reasons are Vulcan Materials (VMC) and Martin Marietta (MLM), both up more than 50% in 2019, leaving the SPX (+19%) in the dust:

Vulcan Materials (VMC), Martin Marietta (MLM), S&P 500 (SPX), 12/31/18–10/16/19. Construction materials stocks price chart. More than double the SPX’s YTD return

Source: Power E*TRADE


And despite the extent to which they’ve already outperformed the broad market this year, both stocks also recently received an analyst upgrade. One of the reasons cited: The stocks were perceived to be relatively recession resistant (it’s hard to avoid the “R” word these days), not to mention being insulated from the US–China trade war, since the materials they produce (gravel, sand, concrete, asphalt, etc. ) are mostly used domestically.1

Not surprisingly, large traders have been acquiring the stock: According to one tracking company, the number of hedge funds holding VMC is at its highest level in five years, the number holding MLM is at a four-year peak, and totals for both were up from the previous quarter.2

VMC and MLM both pulled back from record highs earlier this month but have since rebounded. Because their recent charts are so similar, only MLM is shown below:

Martin Marietta (MLM), 7/22/19–10/16/19. Martin Marietta (MLM) price chart. Current pullback/rebound.

Source: Power E*TRADE


After topping out around $276 on September 30–October 1, MLM pulled back around 5.9% the next two days, closing at $259.79 on October 3. As of yesterday it had rebounded nearly 3%, more or less halfway between the two points, but had consolidated over the past four days.

Traders may accept a test of the early–October low is possible, but as MLM has only once this year (in late-May) traded below a prior swing low like this one, a sharp or multi-day move below it could signal the party is over for the bulls (i.e., the uptrend has been broken), at least for a while. But until that happens, the trends in MLM and VMC are in place.

For a final bit of perspective, the YTD chart below compares MLM and VMC to three stocks that have traditionally traveled under the “momentum” or “high-flying” banners—Amazon (AMZN), Apple (AAPL), and Alphabet (GOOG):

Vulcan Materials (VMC), Martin Marietta (MLM), Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN). Will the real momentum stocks stand up?

Source: Power E*TRADE


Although AAPL managed to keep pace with the two construction materials stocks (thanks to a recent surge), AMZN and GOOGL—despite double-digit percentage gains—aren’t even close.

Possibly a reminder for momentum-seeking traders to look beyond the usual suspects.

Note: VMC is scheduled to release earnings on November 29; MLM on November 5.

Market Mover Update: With a strong Housing Market Index reading yesterday, Housing Starts on tap today, and more housing numbers due next week, traders may be keeping a close eye on homebuilder stocks next week, especially with PulteGroup (PHM) and Meritage Homes (MTH)—two stocks that have rallied to successive record highs in recent days—scheduled to release earnings.

Today’s numbers (all times ET): Housing Starts (8:30 a.m.), Industrial Production (9:15 a.m.), EIA Natural Gas Report (10:30 a.m.), EIA Petroleum Status Report (11 a.m.).

Today’s earnings include: Atlassian (TEAM), Union Pacific (UNP), Honeywell (HON), Intuitive Surgical (ISRG), PPG Industries (PPG), Philip Morris (PM), KeyCorp (KEY), Morgan Stanley (MS), Medidata Solutions (MDSO).

 

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1 Barron’s. Two Materials Stocks That Can Ride Out a Recession, or a Trade War. 10/16/19.

2 InsiderMonkey.com. Hedge Funds Are Crazy About Martin Marietta Materials, Inc. (MLM), and Hedge Funds Have Never Been This Bullish On Vulcan Materials Company (VMC). 10/12/19.

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