Yulong Eco-Materials Limited (NASDAQ:YECO), a USD$8.00M small-cap, is a construction materials company operating in an industry which supplies materials for construction. This means it is highly sensitive to changes in the economic cycle, a key driver of building activities. Moreover, the basic materials sector can be affected by shifts in the housing market, as many produced raw materials are components of construction projects. For example, if new housing development slows, the demand for lumber products may also decrease. Basic material analysts are forecasting for the entire industry, an extremely elevated growth of 34.11% in the upcoming year , and an enormous growth of 55.79% over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the US stock market as a whole. Should your portfolio be overweight in the construction materials sector at the moment? In this article, I’ll take you through the sector growth expectations, as well as evaluate whether Yulong Eco-Materials is lagging or leading its competitors in the industry. See our latest analysis for Yulong Eco-Materials
What’s the catalyst for Yulong Eco-Materials’s sector growth?
Overall, the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be highly competitive and consolidation seems to be a natural trend. However, the industry is still facing many emerging trends including the reduction of waste, raw material inflation, and innovation in global supply chain management. Over the past year, the industry saw growth of 1.79%, though still underperforming the wider US stock market. Yulong Eco-Materials lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means Yulong Eco-Materials may be trading cheaper than its peers.
Is Yulong Eco-Materials and the sector relatively cheap?
The construction materials sector’s PE is currently hovering around 22x, in-line with the US stock market PE of 20x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 8.25% compared to the market’s 10.43%, potentially indicative of past headwinds. Since Yulong Eco-Materials’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Yulong Eco-Materials’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Yulong Eco-Materials recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto Yulong Eco-Materials as part of your portfolio. However, if you’re relatively concentrated in construction material, you may want to value Yulong Eco-Materials based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If Yulong Eco-Materials has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the construction material industry. However, before you make a decision on the stock, I suggest you look at Yulong Eco-Materials’s future cash flows in order to assess whether the stock is trading at a reasonable price, as well as other important fundamentals such as the company’s financial health in order to build a holistic investment thesis.
For a deeper dive into Yulong Eco-Materials’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other basic materials stocks instead? Use our free playform to see my list of over 2000 other basic materials companies trading on the market.