Source: Market Watch
By Sam Subramanian, AlphaProfit
SUGAR LAND, Texas (MarketWatch) — Backed by the potential for margins to widen and deal activity to provide abnormal returns, the leadership of chemical stocks seems sustainable.
Selected groups in the consumer discretionary and technology sectors like auto and computers led the way in 2009 as stock prices started to recover from the Great Recession.
In 2010, the leadership shifted to groups like transportation.
In recent months, stock prices in groups like auto, computers, and transportation have sputtered.
The chemicals group is different in this regard. Shares here performed well in both 2009 and 2010 and they continue to fare well in 2011.
Over the past year, the Dow Jones Chemicals Titans 30 Index DJACHE.DJ +1.73% is up 34% while the actively managed Fidelity Select Chemicals Fund FSCHX +1.46% is up 36% compared to the 12% advance of the Standard & Poor’s 500 Index SPX +0.53% , as of Wednesday.
With industry margins likely to widen and deal activity adding spice, chemical company stocks have a few things going for them that can help them sustain their leadership.
Industry profits poised to rise
Chemical companies cut costs to the bone during the downturn. With the economy now growing, product demand in individual industry segments is increasing. The resulting operating leverage is helping chemical companies widen their margins.
Agricultural chemicals: The secular forces of global population growth and higher per-capita income in emerging economies are lifting commodity crop prices. The United Nations reports that global food costs are at record levels.
High crop prices provide significant incentive for farmers to increase acreage and yields. The U.S. Department of Agriculture recently stated that U.S. corn acreage this year would be second highest in 67 years.
Fertilizer producers like Potash Corporation POT 0.00% and Agrium AGU 0.00% as well as seed developers like Monsanto MON 0.00% and DuPont DD 0.00% stand to benefit from the drive to increase farm output.
Petrochemicals and plastics: Demand for petrochemicals and plastics is rising from growth in emerging markets and recovery of the auto industry.
