Sector Profit Alert: Materials

July 2, 2009

Dear Fellow Investor,

Our Sector Profit Alert strategy is working! By focusing on sector trends, we’ve been able to identify pockets of strength and zero in on the best stocks to buy now. Our biggest winner so far is Orchid Paper (TIS), which was one of our first buys on June 18. The stock has soared almost 16% since then while the S&P 500 is actually DOWN 2.4%!

Anytime a stock moves up like that in such a short period of time, it’s natural to wonder if you should sell. Currently, I do not want you to sell any of our picks because I believe more gains are ahead—but please rest assured that I will give you explicit instructions when it’s time to pull the trigger and take your profits. So keep checking your email every Thursday evening for info on all of our Sector Profit Alert stocks.

Speaking of stocks, I have three more buys for you today in this week’s featured sector: Materials.

Sector Profit Alert: Materials

So what exactly are materials stocks? In a nutshell, these companies provide the raw materials for just about any product you can think of. They mine metals used in cars, cut trees used to make paper, and create an array of chemicals used as fertilizers and cleaners and glue.

I’ll admit it’s not the most glamorous sector. These jobs are normally dirty and take place behind the scenes. But the materials sector has tremendous profit potential because it is at the top of the food chain. Just try to name a business that doesn’t use industrial chemicals, paper products or metal. It’s almost impossible!

That’s one of the reasons I find this sector so attractive right now. While the American economy is fighting through the end of this recession and U.S. consumer spending remains relatively weak, businesses are pulling out all the stops to grow sales and increase their margins. But for materials stocks, there’s never a shortage of customers. These companies provide the goods that are crucial to the day-to-day operations in almost every business.

Take one of my favorite stocks, Corriente Resources (ETQ). This company is a copper powerhouse that does most of its mining in Ecuador, and produces the metal used in pipes, electrical wires and heaters of all shapes and sizes. I’m sure you can name at least a dozen places in your own home that could contain copper parts like these. By providing raw materials instead of a finished product, companies like Corriente naturally have a much broader customer base—which adds stability to their business.

There’s more: The wide array of businesses that rely on Corriente Resources for this copper are paying more for their raw materials—MUCH more. Through June, copper prices have surged almost 70% so far in 2009—the best six-month rally in 22 years! That means that the mining companies can ask a much higher price for this metal and produce even bigger profits.

As you can see, this stock is in a great position to succeed no matter what happens to the broader market. It has a wide customer base and produces a raw material that is in high demand, and it is commanding higher prices for those materials week after week. This is the recipe for big profits! What’s more, the story of Corriente Resources is repeated around this sector—companies producing vital raw materials and selling them at great prices with a fat margin.

That’s why I’m so excited about the materials sector, and why I think it’s a great place to find money-making stocks today.

How Materials Stocks Make You Money

Overall, there’s a lot to like about the materials sector. In my blog, I have been talking up materials for a while, and I recently recommended a materials ETF to my Blue Chip Growth subscribers as part of our exciting (and VERY profitable!) new focus on exchange-traded funds. But as you know from our previous issues of Sector Profit Alerts, we need to dig deeper to find the best of the best—and avoid the stocks that are lagging behind the rest of the sector.

It’s probably not much of a surprise to hear that construction materials stocks aren’t doing so well. After all, there’s no rush to build new homes with an inventory of 2.1 million unoccupied houses on the market. And with businesses cutting back, few businesses are expanding operations or upgrading facilities.

So where do we look to find the biggest bang for our buck? In metals and mining stocks!

In stark contrast to construction stocks, metal and mining stocks are soaring right now. I mentioned before how copper has surged, and I’m sure you have noticed that silver and gold are trading near record highs. That’s part of the reason you see all those ads on TV asking for your old jewelry—because gold is more valuable now than ever before as jittery investors take shelter in the precious metal as a safe-haven amid the recent market turmoil. Companies that produce these metals are seeing booming sales and profits—and that makes them some of the hottest stocks in the hottest sector.

But I must offer a word of caution—it’s very important to make sure you buy a mining stock that is seeing its margins expand as the material it produces gets more and more expensive. For instance, steel stocks are really hurting despite the fact that copper, silver and gold stocks are booming right now. That’s because experts have forecast that 2009 worldwide steel demand will fall about 20% this year compared with 2008, and steel prices have fallen dramatically as a result. It’s not hard to see why—with automobile sales languishing and few consumers buying big ticket items like refrigerators, the steel business has dried up. There’s just not the same demand, and profit margins are smaller as a result.

Now that we’ve broken down the materials sector, let’s take the final step and buy some winning stocks based on this analysis. I have three sizzling stocks that I recommend as strong buys this week—and as a special bonus, one red-hot ETF!