We all know who makes the products that play huge roles in
Americans' daily lives -- the Apples and Coca-Colas and Exxon
Mobils and Hondas of the world. But do you know who makes the
products used to make those firms' well-known products?
In many cases, the answer to that question is chemical
companies. From plastics to fuel additives to food flavorings,
chemical companies have a hand in many, if not most, of the
products that you can find throughout your home or office every
Right now, chemical manufacturers have a couple major factors
working in their favor. First, there is the rise of "fracking" in
the U.S., which has made natural gas more abundant and cheaper.
Natural gas is one of the key ingredients in a myriad of products
made by chemical companies, and it's also a major source of power
that those companies use in creating their products. Cheap natural
gas therefore can mean wide profit margins for many of these
In addition, as the nascent U.S. housing recovery continues,
demand for many construction products that are created with the
help of chemicals -- paint, glass, and polyurethane, to name just a
few -- should continue to rise.
Of course, there are concerns to consider as well. Chemical
stocks tend to be quite cyclical, so the slowdown in China and
potential problems with the U.S. "fiscal cliff" are risk factors.
But some of those fears already appear baked into valuations, with
the chemical manufacturing industry sporting an overall
price/earnings ratio of just 13.5. And in terms of individual
chemical plays, my Guru Strategies (computer models that are each
based on the approach of a different investing great) are finding
several that look very intriguing right now. Here are a few that
get particularly high marks from these strategies. Keep in mind
that these types of stocks should be considered within a broader,
Stepan Company (
Based in Illinois, Stepan makes a variety of chemicals, ranging
from surfactants used in cleaning products, to polymers used in the
construction and auto industries, to specialty products like
natural flavorings. The firm has a market cap of about $1 billion,
and gets strong interest from two of my strategies. My James
O'Shaughnessy-based approach likes that it has upped earnings per
share in each year of the past half-decade, and that it has a key
tandem of qualities: a high relative strength (76) and a low
price/sales ratio (0.55). That indicates that the stock is getting
some love from investors, but hasn't yet gotten too pricey.
My Peter Lynch-based model likes Stepan's impressive 41.6%
long-term EPS growth rate. (I use an average of the three-, four-,
and five-year EPS growth rates to determine a long-term rate.)
Lynch famously used the P/E-to-Growth ratio to find bargain-priced
growth stocks, and when we divide Stepan's 14.0 P/E ratio by that
long-term growth rate, we get a PEG of 0.34. That falls into this
model's best-case category (below 0.5).
The Mosaic Company (
Minnesota-based Mosaic is the world's leading producer and marketer
of concentrated phosphate and potash, key nutrients involved in
growing crops. It makes a variety of fertilizer products, as well
as industrial products and animal feed products. The
$21-billion-market-cap firm gets strong interest from the model I
base on the writings of Benjamin Graham -- the man known as the
Father of Value Investing. The strategy likes Mosaic's 3.9 current
ratio, which is a sign of good liquidity, and its strong balance
sheet (the firm has nearly $5 billion in net current assets and
just $1.0 billion in long-term debt). It also sees good value in
Mosaic's shares, which trade for 12.4 times three-year average
My Lynch-based model, meanwhile, considers Mosaic a "stalwart"
because of its moderate 10% growth rate and high sales ($10.5
billion over the past year) -- these are the kind of large, steady
firms that Lynch found offered protection during downturns or
recessions. For stalwarts, Lynch included dividend yield in the
"growth" portion of the PEG ratio, and Mosaic has a yield-adjusted
PEG of 0.96. That comes in just under the strategy's 1.0 upper
limit, a sign the stock is a good deal.
Balchem Corporation (
New York State-based Balchem makes specialty performance
ingredients and products for the food, nutritional, pharmaceutical
and medical sterilization industries, with end-users including both
humans and animals. It ha a market cap just under $1 billion, and
it gets strong interest from my Warren Buffett-inspired model. A
few reasons: It has increased earnings in 9 of past 10 years (with
the lone dip coming nine years ago); it has no long-term debt; and
it has averaged a 10-year return on equity of almost 17%.
Sasol Limited (
Sasol, based in South Africa, makes a wide range of chemicals, as
well as liquid fuels and electricity. It operates in more than
three dozen countries around the globe.
Like Mosaic, Sasol ($27 billion market cap) gets strong interest
from both my Graham- and Lynch-based models. The Graham approach
likes its 2.12 current ratio, and the fact that its net current
assets of $3.9 billion nearly triple its long-term debt of $1.4
billion. Sasol is also cheap, trading for 10.8 times three-year
My Lynch-based model, meanwhile, likes Sasol's 5% dividend yield
and yield-adjusted PEG of 0.64.
NewMarket Corporation (
Based in Virginia, NewMarket ($3.2 billion market cap) began as a
paper company 145 years ago. Today, it develops chemical additives
that make fuels burn cleaner, engines run smoother, and machines
NewMarket has been growing EPS at a 39.7% rate over the
long-term, a big reason why my Lynch-based model likes the stock.
In addition, it trades for a reasonable 14.7 times earnings, which
makes for an excellent 0.37 PEG ratio.
My O'Shaughnessy-based growth model likes that NewMarket has
upped EPS in each year of the past half-decade, and also likes its
combination of a solid 81 relative strength and reasonable 1.46
I'm long SSL, MOS, SCL, and NEU.