The Materials Select Sector SPDR ETF (XLB) is up 5.7% year to date as of Monday, which makes it the second-best performing sector this year, outpacing the 4.0% gain so far in the S&P 500. The fund holds several large companies that are involved in mergers; they include DuPont (DD) and Dow Chemical (DOW) , as well as agricultural products giant Monsanto (MON) , which is being acquired by Germany's Bayer (BAYRY) . (Dow Chemical is part of Jim Cramer's Action Alerts PLUS charitable trust.)
Investors may be anticipating growth in basic materials because of campaign promises made by Donald Trump, who as president immediately has set to work on trade, regulatory and economic issues.
Plans for $1 trillion in U.S. government infrastructure spending on a variety of tunnel, highway and other projects, as well as support for new energy pipelines, reduced corporate taxes and deregulation, are boosting the stocks of companies that make the materials that will be used for all this building and expansion. A potential downside would be retaliation from foreign trade partners that would result from any protectionist actions taken by Washington.
Lumber producers, paint manufacturers and metal refiners also should benefit from increased domestic demand, as should cement makers and heavy equipment and hauling companies. Since November, commodity prices have rallied, especially copper, though prices have slipped back more recently.
In a world where there is growth and rising rates, stocks of cyclical companies and growth companies as well as financials also benefit.
Look at Universal Forest Products (UFPI) . The maker of wood for the construction, industrial and retail markets scores highly based on the strategy of market guru James O'Shaughnessy, author of "What Works on Wall Street." The $2 billion market cap company ranks in the top 50 stocks screened based on his criteria, which look at earnings growth over time and price to sales to find undervalued stocks. Shares of Universal Forest Products are up 1.6% so far this year.
Shares of Sherwin-Williams (SHW) , which have surged about 15% this year, fit the strategy of Warren Buffett, who likes companies with long-lasting competitive advantages. The paint and coatings company has a prominent brand and a dominant market share and will add to that with its acquisition of Valspar VAL once it clears regulatory approval, which might require the sale of business units. The shares have long-term historic growth of 13% and projected growth of 10%.