Your instant 5-share materials portfolio

There is more to the materials sector than mining and resources.

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When investors think of the materials sector they no doubt immediately think mining and resource stocks. This is fair enough as the industry groupings of Aluminium, Diversified Metals & Mining, Gold, Precious Metals & Minerals, Steel and Paper & Forest Products together account for around 800 companies. While some investors – rightly or wrongly – shy away from mining and resource stocks due to the inherent difficulty in forecasting commodity prices, there are other industries housed within the materials sector which don’t have the same level of direct commodity exposure and could be of interest to investors.

These industry groups are Chemicals, Construction Materials and Containers & Packaging. Here are five stocks from these three industries which stand out for their long-term potential and also their limited exposure to simply being a price taking commodity producer thanks to their ability to value-add.

DuluxGroup Limited (ASX: DLX) is best known for its branded paint products but the company also manufactures many other products for the residential and commercial building customers. The Dulux brand name is an example of a company who has taken a commodity product – paint – and value-added.

There are a number of factors which have contributed to Nufarm Limited’s (ASX: NUF) poor performance in recent years. These include excessive debt levels, weak demand due to extreme weather conditions and increased competition from generic products at the expense of branded products. This final point – the substitution of branded herbicides, insecticides and fungicides for generic alternatives – investors need to watch closely. If Nufarm can overcome this issue and not simply be a price taking commodity producer then there could be upside in the stock.

The attention to running an efficient and lean business model gives Brickworks Limited (ASX: BKW) its own comparative advantage by being a low cost producer of bricks and other building materials. Its leverage to higher volumes is also important and with data suggesting home building is set to grow, the outlook for Brickworks is positive.

Despite some significant shareholder destruction in the form of the Viridian acquisition, CSR Limited (ASX: CSR) has done a good job at creating value-added products which command a price premium for the benefit of shareholders. These products include the Gyprock and Monier brands.

Much like Brickworks, Amcor Limited (ASX: AMC) also runs an efficient operation which creates a form of comparative advantage. With global operations, Amcor can leverage its buying power and customer relationships to be a low cost producer of packaging solutions.

Foolish takeaway

Notably, many of these businesses are cyclical. Buying them at the bottom of the cycle and selling them at the top is ideal but hard to execute. Housing and building related stocks are perhaps too far into the cycle to buy, however Amcor’s global business is smoother and now could be a good time to consider adding agricultural exposure to your portfolio.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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