Three Top Basic Material Stocks For The Future

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investors love technology and big-name companies. As many a wise investor of past or present would tell you, though, sometimes the boring companies pay out more than those fast-growing tech firms, and they’re generally more stable, too. The basic materials sector may not be investors' favorite, but its boring facade still conceals some good buys.

The basics of basics

Basic material stocks tend to be incredibly sensitive to market moves, especially moves in the commodities they deal with. For this reason, you’ll definitely want to do the extra research to figure out the best time to buy these types of stocks.

All three of stocks below pay a dividend, and they all come with high ratios of cash flow / enterprise value (EV), which shows you how a business uses its money. The higher the ratio, the more likely that a company can increase its dividend, or dump a large sum of cash into growth. EV can be found, according to the Investopedia definition, by taking “market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents.” Many investment sites provide you with this figure, but if not, it isn’t too hard to find.

The Top Three

Without further ado, here are the three companies that pay a dividend and come out with a pretty high LFCF/EV ratio.

In first place, we have HollyFrontier (NYSE: HFC). This company has an LFCF/EV ratio of 15.4% and a dividend yield of 2.1%. The high LFCF/EV ratio implies that the company could eventually give the dividend a bump.

HollyFrontier operates as an independent petroleum refiner. The company has operations in five states and their HQ can be found in Dallas, TX. Throughout its five refineries, it has a total crude processing capacity of 443,000 barrels per day.

HFC has a current P/E ratio of 7.5, along with a market cap of $11.5 billion. Metrics like a 15.12% return on average assets, and a 34.68% return on average equity, make this company look quite appealing. Sure, they’re unlikely to refine their way up to ExxonMobil sizes, but they can still make you a very nice return along the way.

In second place is FutureFuel (NYSE: FF). FutureFuel has an LFCF/EV ratio that sits right around the 12% mark. The company also pays a fairly hefty dividend that sits at 3.4%. 

FutureFuel is a very nice looking small-cap company engaged in the manufacturing and marketing of chemicals and biofuels. This company is definitely atop my further research list, as it could really take off with any major switches in energy requirements.

For now though, we should note that the company has a P/E of 14.2 and that market cap is right around the $550 million level. The return on average assets at FF sits at the 12.57% mark while the return on average equity is 16.68%. FF also has only 500 employees, this is a very small company at current, but I’d still take a further look.

In third place is Delek US Holdings (NYSE: DK). Delek has an LFCF/EV ratio of 11% and it brings a 1.1% dividend yield along with it.

Delek US is another energy-based company that has assets in refining, retail and logistics. Those areas combined give us a $2.3 billion holding company that carries a P/E ratio of 10.89. The ratios at this company, like the previous two, look pretty nice. DK has a return on average assets of 18% and a return on average equity of 50%. I doubt many companies would complain about those numbers.

Bottom Line

I like all three companies. If I were to look further into them, though, I’d have to go with FutureFuel first, as it's dealing with something totally different in biofuels. When it comes to HollyFrontier and Delek, I’d have to recommend HollyFrontier first, given its higher LFCF/EV ratio.

As always, make sure you look into these companies yourself, and don’t go rapidly buying without any real due diligence.

Ash1402 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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