Basic Materials: Sector Rises but Underperforms, Leaving Opportunities in Chemicals and Agriculture

The Morningstar US Basic Materials Index rose during the second quarter but underperformed the US Market Index. This reversed the strong outperformance during the first quarter. Yet over the past 12 months, the Basic Materials Index has slightly outperformed the broader US market.

Most of the sector is now fairly valued or overvalued. No names currently trade in 5-star territory, and a little over 45% of the sector trades in 4-star territory. We see some opportunities in chemicals and agriculture, which are the two industries with the most undervalued stocks among our coverage.

In specialty chemicals, producers are seeing cost inflation from their commodity chemical inputs because of the supply shock from the Middle East conflict. Using the industrial chemicals producer price index, commodity chemicals prices are at levels last seen during the post-pandemic inflationary period, though still below the 2022 peak. Specialty chemicals producers sell differentiated products, which are often necessary for their customers. This results in pricing power that allows specialty producers to raise prices to pass along cost inflation, though sometimes at a lag depending on contracts. While the market focuses on potential near-term cost inflation weighing on profits, specialty producers should be able to recover all cost inflation over the long term.

In agriculture, seed and crop chemical producers are also experiencing higher input costs. Like specialty chemical producers, these rising costs can be passed along through price increases. For seed producers, farmers are generally less price-sensitive, as this is a crucial input that can have one of the largest effects on farmers’ crop yields.

The SpaceX IPO has put a spotlight on the rocket launch supply chain, sparking investor interest in companies with exposure to the commercial space boom. We see industrial gas firms as a low-risk play on the commercial space race. Although we estimate that the space end market currently accounts for only a low-single-digit percentage of revenue for the three industrial gas firms we cover, we expect it to become a meaningful driver of revenue growth over at least the next 15 years.

Top Basic Materials Sector Picks

Ecolab ECL

• Fair Value Estimate: $300.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Ecolab is our top pick to invest in specialty chemicals producers’ ability to pass along cost inflation. The stock trades at a discount of about 10% to our $300 fair value estimate. Ecolab’s wide-moat rating comes from switching costs, as its direct selling model facilitates building products and services and a razor-and-blade products model that becomes an integral part of its customers’ process. This allows Ecolab to use cost inflationary periods to not only raise prices to pass along cost inflation, but also upsell customers to new products or add higher-margin digital services. As a result, we see strong long-term growth for the company.

Corteva CTVA

• Fair Value Estimate: $90.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Corteva is our top pick to invest in seeds and crop chemicals. The stock trades around 10% below our $90 fair value estimate. Corteva’s wide moat comes from its strong pricing power in its patented and differentiated seeds and crop chemicals portfolio, as farmers will pay up for these inputs. Seeds generate the majority of profits, and we expect strong profit growth in both seeds and crop chemicals in 2026, driven by new product launches. Corteva is spinning off its seeds business by the end of this year, which will be a publicly traded company named Vylor. Current shareholders will end up with shares of Corteva and Vylor.

Linde LIN

• Fair Value Estimate: $540.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

Linde is our top US industrial gas pick. The stock trades roughly 5% below our $540 fair value estimate. We assign Linde a wide moat based on switching costs and intangible assets. The company benefits from a resilient business model with contractual mechanisms that shield it from volatility in energy prices and global industrial production. We believe Linde is well-positioned to capitalize on SpaceX’s ambitious launch cadence and transition to more propellant-intensive Starship rockets. Although we estimate Linde’s current space exposure at only around 1% of revenue, we expect it to increase 7 times over the next five years.