The tech sector is on fire. We know this. Everyone knows this.
And as I wrote yesterday, the stock market is so heavily weighted to the AI trade that when tech stocks move, the broader market tends to move with it.
You should be invested in tech right now. It’s leading the market for a reason.
But that shouldn’t be the only sector you’re invested in.
Market sentiment can shift quickly, and the last thing you want is to be overexposed to a single theme when momentum starts to fade.
That’s why one statistic from last week caught my attention.
While technology continued to outperform, only one other sector managed to beat the S&P 500 Index – materials.
At first glance, that may seem surprising. But tech and materials are both part of the same “AI trade.”
AI may live in software, but it requires an enormous physical buildout. Data centers need steel, copper, concrete, chemicals and a host of other raw materials before a single AI model can generate a response.
And the bullish case for materials extends beyond AI.
Commodity stocks have historically performed well during inflationary periods.
With price pressures already elevated — and geopolitical tensions in the Middle East threatening to further disrupt global supply chains — that tailwind may be strengthening rather than fading. So, what does my system see in the materials sector today?
Let’s dig into the data and find out.
Looking top-down, materials don’t rate super well in my Green Zone Power Ratings system. Seven out of 26 rate as “Bullish,” meaning they have a score of 60 or higher out of 100. (For those new to my Green Zone Power Ratings system, “Bullish” rated stocks outperform the S&P 500 by double on average over the following year.)
Another seven rate as “Neutral,” meaning my system would expect them to perform more or less in line with the broader market. The rest rate as “Bearish.”
Still, seven “Bullish” names give us something to work with. My system is telling us there are plenty of solid trading opportunities.
So, let’s keep digging!
Where Do Materials Pick Up Points?
The Green Zone Power Rating system is a composite score based on six primary factors: momentum, size, volatility, value, quality and growth, each of which is composed of several sub-factors. (As we are looking at large-cap constituents of the S&P 500, I don’t consider size when doing the sector X-ray.)
Let’s take a look to see where materials stocks pick up points.
Interestingly, more than half of the sector’s stocks rate “Bullish” on their quality factor.
My quality factor is a composite rating of various measures of profitability, cash flow, balance sheet strength and capital efficiency. It generally rewards “capital light” businesses, like software makers or those that derive much of their value from brand recognition.
Materials companies tend to be extremely asset heavy and sell non-branded commodities.
So, how do we explain this seeming contradiction?
Easy.
The stocks in the sector are enjoying bumper profits right now, and the exceptionally high profitability ratings are pulling the quality factor higher.
Perhaps not surprisingly, given the importance of materials to the AI trade, growth and momentum are strong factors for the sector. Twelve of the materials stocks rate as “Bullish” on growth and another 11 on momentum.
It’s the high-momentum materials stocks I’m most interested in today. This is what the market is favoring in this environment.
High-Momentum Materials Stocks
Lithium has been in high demand for decades because it’s a critical component in lithium-ion batteries that power smartphones and other mobile devices.
The boom in electric vehicles (EVs) turbocharged this trend, and the AI revolution is currently doing the same as today’s massive data center buildout continues.
AI data centers require stable power, which means they need robust battery backup systems to protect against outages and voltage spikes.
Not surprisingly, this has created a windfall for leading lithium miner Albemarle (ALB).
I recommended Albemarle to my Green Zone Fortunes subscribers back in April, along with several other stocks primed to profit from what I believe may be Elon Musk’s greatest invention.
It’s not his self-driving cars, his humanoid robots or his reusable rockets. All of that is amazing, of course, but his most revolutionary invention is something a lot simpler and more practical.
It’s his plug-and-play battery system, powerful enough to light up 1,000 homes for a full day on a single charge. (To find out how the system we use in Green Zone Fortunes is designed to cut through the narrative and focus on what the market is actually rewarding, click here to learn more.)
Albemarle isn’t the only Green Zone Fortunes stock to make this list.
I recommended fertilizer leader CF Industries (CF) back in February.
My premise was simple enough.
I knew that a boom in living standards driven by AI would directly translate to higher demand for meat. In every case since the dawn of civilization, a rise in living standards has led to higher consumption of animal protein.
But beyond that, I also knew we could see a short-term catalyst in the potential closure of the Strait of Hormuz… and that’s exactly what happened just days after the Iran war broke out.
We may see short-term volatility in CF if, or when, the Strait is “officially” reopened. But the long-term bullish case remains intact. AI will lead to a bull market in food, and CF will be a direct beneficiary.
To good profits,
Adam O’Dell
Editor, What My System Says Today
