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5 Growth Stocks Set to Ride the Chemical Industry's Upswing

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The chemical industry is gaining momentum after being stuck in a rut for a spell, making it an attractive investment proposition. The industry’s upturn is backed by a resurgent global economy and strength across major end-use markets such as construction and automotive.

Improving fundamentals in the energy space — another key market for chemicals — has also been a significant tailwind for the chemical industry. A rebound in crude oil prices has led to a recovery in demand for chemicals in the energy market and a favorable pricing environment for chemical products.

The chemical industry wrapped up 2017 with a strong fourth quarter, continuing the momentum witnessed in the third. A host of companies in the space came up with forecast-topping earnings in the quarter, driven by continued strong demand across automotive and construction markets as well as strategic measures including productivity improvement, pricing actions, portfolio restructuring and earnings-accretive acquisitions.

Per the Zacks Industry classification, the chemical industry is grouped under the broader Basic Materials sector. The Basic Materials sector is among the Zacks sectors that scored the strongest gains in fourth-quarter 2017. Overall earnings for the sector climbed 45.2% while revenues spiked 21.3%. Roughly 89.5% of the sector participants posted earnings beat and around 73.7% surpassed revenue estimates.

The Zacks Industry Rank of 61 carried by the Zacks Chemicals Diversified industry is a testimony to the fact that the chemical industry is in good health. The favorable rank places the industry in the top 24% of the 250+ groups enlisted. Our back testing shows that the top 50% of the Zacks ranked industries outperforms the bottom half by a factor of more than two to one.

Notwithstanding some lingering headwinds, the chemical industry’s upturn is expected to continue this year as the fundamental driving factors remain firmly in place.

Strong Export Market, Investments Drive U.S. Chemical

The U.S. Chemical Industry has clawed its way back from the devastation wrought by Hurricane Harvey and is well set to ride the growth wave this year. The American Chemistry Council ("ACC"), an industry trade group, envisions U.S. chemical production (excluding pharmaceuticals) to rise 3.7% in 2018.

The growth is expected to be spurred by higher demand across light vehicles and housing markets, capital investments and improved export markets. Major export markets such as Latin America and Asia are also expected to play a significant role in basic chemical production growth this year and the next. Strengthening export markets and increasing capital spending are also driving chemical demand across key end-use markets such as light vehicles and housing.

The United States remains an attractive investment destination for chemical investment and domestic chemical makers continue to enjoy the advantage of access to abundant and cheaper feedstocks and energy. This is driving investment in chemical production projects. Per the ACC, the chemical industry has invested $185 billion in new factories, expansions and restarts of plants across the United States with more than half of these projects presently in the planning stage. Such investments are expected to boost capacity and export over the next several years.

EU Chemical Industry Swings Back to Life

The European chemical industry is also back on track after a long detour, taking succour from an improving global economic sentiment and an upturn in the Eurozone economy. Eurozone’s recovery has been backed by a pick-up in global economic activity, declining unemployment, strengthening business and consumer confidence and monetary stimulus from the European Central Bank.

According to the European Chemical Industry Council (CEFIC), chemical output in the European Union (EU) climbed above the pre-crisis level for the first time in the fourth quarter of 2017. Amid a favorable operating environment, the European chemical industry saw a spike in output across most chemical sub-sectors along with a surge in chemical prices in 2017. CEFIC envisions EU chemical output to rise 2% year over year in 2018.
 
5 Chemical Growth Plays

The chemical industry’s momentum is expected to continue this year on sustained demand strength across construction and automotive markets, a rebound in demand in the energy place and significant capital investment. Amid such a backdrop, it would be a prudent idea to invest in chemical stocks with compelling growth prospects if you are looking to reap solid returns from your portfolio.

Growth investors look for stocks with aggressive earnings or revenue growth potential, which should lead to higher stock prices. Here we put a spotlight on chemical stocks that are poised for strong growth. With the help of our Style Score System, we have picked five stand-out stocks that have excellent prospects and might offer solid investment returns.

Our research shows that stocks with Growth Style Score of A or B when combined with Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the growth investing space. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Chemours Company (CC - Free Report)

Delaware-based Chemours sports a Zacks Rank #1 and a Growth Score of A. The Zacks Consensus Estimate for earnings for 2018 is currently pegged at $5.30, reflecting an expected year-over-year growth of 38.7%. Chemours also has a long-term expected earnings per share (EPS) growth rate of 15.5%.

Annual estimates for Chemours have also moved north over the past 60 days, reflecting analysts’ confidence on the stock. Over this period, the Zacks Consensus Estimate for 2018 and 2019 for the company have increased by around 6% and 3%, respectively.

Univar Inc.

Our next pick in the space is Illinois-based Univar armed with a Zacks Rank #1 and a Growth Score of B. The company has expected earnings growth of 23.7% for 2018. It also delivered positive earnings surprise in three of the trailing four quarters with an average beat of 20.8%.

The estimates for both 2018 and 2019 for the company have also increased by around 15% and 2%, respectively, over the last 60 days. Univar also has long-term expected EPS growth rate of 8.6%.

Huntsman Corporation (HUN - Free Report)          

Texas-based Huntsman is another attractive choice with a Zacks Rank #2 and a Growth Score of A. The company has expected earnings growth of 10.5% for 2018. It also has a long-term expected EPS growth rate of 8.3%.

Huntsman also delivered positive earnings surprise in each of the trailing four quarters with an average beat of 31.5%. The estimates for both 2018 and 2019 for the company have also increased by around 13% and 6%, respectively, over the last 60 days.

Stepan Company (SCL - Free Report)      

Headquartered in Northfield, IL, Stepan has a Zacks Rank #2 and a Growth Score of A. The company has expected earnings growth of 11.2% for 2018. It delivered a positive earnings surprise of 58.2% in the last reported quarter. The estimates for both 2018 and 2019 for the company have also increased by around 8% and 5%, respectively, over the last 60 days.

BASF SE (BASFY - Free Report)

Germany-based BASF has a Zacks Rank #2 and a Growth Score of B. The company delivered positive earnings surprise in three of the trailing four quarters with an average beat of 5.8%. It has expected earnings growth of 13.7% for 2018. The company also has a long-term expected EPS growth rate of 6.7%.

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