Basic Materials: Sector Falls, Leaving Opportunities in Chemicals and Agriculture

The Morningstar US Basic Materials Index fell during the third quarter. Over the past 12 months, the index has underperformed the broader US market. As a result, most of the sector is now undervalued. Just over 50% of these stocks trade in 4- or 5-star territory. We see opportunities in chemicals and agriculture, where most stocks under our coverage are undervalued.

In lithium, we forecast average prices will roughly double in 2026 versus 2025 as the market moves from oversupply to balance. Prices briefly rose above our $20,000 long-term price forecast based on the marginal cost of production. We forecast lithium prices will remain well above the lows of 2025, even as supply restarts and new production enters the market due to strong demand growth from growing global electric vehicle sales and the buildout of utility-scale energy storage system batteries. For low-cost lithium producers, higher prices should lead to strong profit growth in 2026 and solid free cash flow generation over the next few years.

In specialty chemicals, we like producers with less exposure to consumer cyclical end markets. When cost inflation rises for chemical producers, their downstream consumer customers tend to hold less inventory, which can lead to inventory destocking and weigh on producer volumes and profits. However, specialty chemicals producers with end markets such as refrigerants, energy generation, and semiconductors should still see increased demand and generate profit growth.

Semiconductor industry growth has accelerated significantly in recent months, thanks to the AI infrastructure buildout. Chip industry billings (akin to revenue) growth rose at a high-teens pace in 2024, then exploded in recent months to 124% growth in June 2026. For semiconductor chemicals and materials producers, this should result in higher revenue growth.

Top Basic Materials Sector Picks

Albemarle ALB

• Fair Value Estimate: $200.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

Albemarle is our top pick for investing in higher lithium prices. The stock trades more than 40% below our $200 fair value estimate. Albemarle’s narrow-moat rating comes from its cost-advantaged lithium production, as it produces lithium from two of the highest-quality, lowest-cost lithium resources in the world. This allows Albemarle to generate strong unit profits and positive free cash flow as lithium prices rise. As we forecast lithium prices to double in 2026 and rise in 2027, we see strong growth for the company.

Qnity Electronics Q

• Fair Value Estimate: $150.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Qnity is our top pick, given rising demand for semiconductor chemicals driven by the AI infrastructure boom. Shares trade at nearly 20% below our $150 fair value estimate. Qnity’s narrow-moat rating comes from intangible assets, as it is a leader in specialty chemicals and materials needed to manufacture semiconductors and interconnected devices, both of which are key components in data centers. As we forecast the AI-related infrastructure buildout to continue, Qnity should see revenue growth above global semiconductor volumes, as the company can sell more premium products for higher-value chips and interconnected devices used in data centers.

Solstice Advanced Materials SOLS

• Fair Value Estimate: $85.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

Solstice is our top pick among specialty chemicals producers with more favorable end-market exposure. Shares trade at more than 30% below our $85 fair value estimate. Solstice’s narrow-moat rating comes from its patented and differentiated specialty chemicals portfolio, which commands pricing power. The company’s largest end markets are refrigerants, nuclear power generation, and semiconductors, where we forecast higher revenue and profit growth over the coming years.