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5 Chemical Growth Stocks to Buy on Industry's Positive Momentum

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·8 min read
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  • CC
  • ASIX
  • MEOH
  • OLN
  • TROX

The chemical industry witnessed a strong rebound from the coronavirus-led downturn this year, riding on an upswing in demand across major end-use industries such as automotive, construction, healthcare and electronics. The industry faced the heat from a significant slowdown in demand during the first half of 2020 as lockdowns and travel restrictions amid the pandemic brought global economic activities to a near-standstill.

However, with the reopening of the major economies around the world, demand for chemicals started to pick up from the third quarter of 2020 on a rebound in economic activities worldwide. The recovery continued to gain steam this year on an upswing in global industrial activities.

Several chemical companies have been gaining from the positive momentum of the industry. Notable among them are The Chemours Company CC, Olin Corporation OLN, AdvanSix Inc. ASIX, Methanex Corporation MEOH and Tronox Holdings plc TROX.

Chemical companies are benefiting from strong demand and higher product prices. Demand for both commodity and specialty chemicals remains healthy in key end-use markets. Higher demand and prices are driving their top lines and margins.

Despite the semiconductor crunch, chemical makers are seeing healthy demand from the automotive market. The automotive industry has witnessed a recovery after last year’s virus-led slump on the back of strong pent-up demand. Strength is also being witnessed in residential construction globally, supported by lower interest rates and higher demand for new properties due to the rising trend of work from home. Companies in the chemical space are also benefiting from higher demand across healthcare and packaging markets, thanks to coronavirus. These companies are also seeing a recovery in demand across aerospace and energy markets.

The upswing in manufacturing activities is also a major driving force behind the strong recovery of the U.S. chemical industry this year. The U.S. manufacturing sector has kept the momentum going despite the ongoing supply-chain bottlenecks, aided by strong demand for goods and an upturn in the overall economy. The sector has staged a strong rebound from the coronavirus blues with activities showing a V-shaped recovery.

U.S. manufacturing activities expanded in November on an uptick in new orders notwithstanding continued supply-chain disruptions and labor constraints. The U.S. Manufacturing Purchasing Managers’ Index registered 61.1% in November, rising from 60.8% in October reflecting expansion in the overall economy for the 18th straight month, per the Institute for Supply Management. A reading above 50 indicates expansion in activity. New orders rose for the 18th month in a row in November indicating higher demand for manufacturing products.

The accelerated deployment of vaccines coupled with the sizable coronavirus stimulus have led to a surge in consumer spending despite inflationary pressures. Businesses are struggling to keep up with strong demand amid raw material and worker shortages that are affecting production.

The manufacturing sector is a major driver for the chemical industry which touches around 96% of manufactured goods. As such, the strength in the sector augurs well for the U.S. chemical industry.

However, chemical companies are reeling under the effects of raw material cost inflation as well as higher supply chain and logistics costs. Supply chain disruptions due to coronavirus and weather-related events have led to a spike in raw material costs. Supply tightness continues for a number of key raw materials, including several resins, natural gas, propylene, butadiene and glass fiber.

Hurricane Ida dealt another blow to the supply chain. Force majeures and plant shutdowns associated with Ida further squeezed the supply of raw materials including ethylene and propylene and pushed up their prices, the impacts of which had been witnessed in third-quarter 2021. The impacts of supply chain and logistic bottlenecks, exacerbated by the unfavorable weather events globally and the resurgence of coronavirus infections, are expected to continue through the balance of 2021 and into 2022.

5 Chemical Growth Plays

The chemical industry has staged a strong comeback after bearing the brunt of coronavirus fallout. Strong end-market demand driven by higher industrial activities is expected to help the industry to continue the recovery momentum. As such, it would be prudent to zero in on stocks in the space that have healthy prospects.

Growth investors look for stocks with aggressive earnings or revenue growth potential, which should lead to higher stock prices. With the help of our Style Score System, we have picked five stand-out chemical stocks that have compelling 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.

Chemours: Delaware-based Chemours sports a Zacks Rank #1 and has a Growth Score of A. It is gaining from a rebound in demand from the pandemic-led lows, strong execution and cost-reduction and pricing actions. CC is seeing demand revival across its end markets and regions on the global macroeconomic recovery. Strong market demand is contributing to higher volumes and improved pricing. It is benefiting from strong demand in refrigerants across most regions and is also witnessing strong adoption of the Opteon platform in all markets. The company’s cost-reduction program along with its productivity and operational improvement actions across its businesses are expected to support margins in 2021.

Chemours has an expected earnings growth rate of 105.1% for the current year. The Zacks Consensus Estimate for CC's current-year earnings has been revised 10% upward over the last 60 days. Chemours beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 34.2%.

Olin: Based in Missouri, Olin flaunts a Zacks Rank #1 and has a Growth Score of A. It is benefiting from the Lake City U.S. Army ammunition contract, productivity actions and investment in the Information Technology (IT) project. Its Winchester segment is benefiting from the Lake City contract, which is driving sales in this unit. OLN also remains committed to improve its cost structure and efficiency and also drive productivity through a number of projects. It is also expected to gain from cost and other benefits from its investment in the IT project.

Olin has an expected earnings growth rate of 740% for the current year. The consensus estimate for OLN's current-year earnings has been revised 17.1% upward over the last 60 days. It also has an expected long-term earnings per share growth rate of 56%.

AdvanSix: New Jersey-based AdvanSix sports a Zacks Rank #1 and has a Growth Score of A. It is benefiting from improved end-market conditions and growth of its differentiated products. ASIX is seeing a recovery in demand across a number of markets including automotive, building & construction, electronics and packaging. Higher demand is driving its volumes. Strong agricultural industry fundamentals also bode well. Favorable market conditions and tight industry supply are supporting demand for nylon in North America. Strong demand for chemical intermediates is also being witnessed across a number of markets. Higher prices are also contributing to its top line growth.

AdvanSix has a projected earnings growth rate of 196.9% for the current year. ASIX's consensus estimate for the current year has been revised 6.8% upward over the last 60 days. It beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 46.9%.

Methanex: Canada-based Methanex carries a Zacks Rank #1 and has a Growth Score of B. It is gaining from healthy demand for methanol on the back of the ongoing economic recovery. MEOH is also benefiting from an upswing in methanol pricing. Strong methanol demand coupled with ongoing industry supply challenges is driving methanol prices. Higher demand and robust prices are driving its top line. Methanex also remains committed to strengthen its balance sheet and maintain its strong liquidity position. The Geismar 3 project is also expected to bolster its portfolio and support its future cash generation.

Methanex has an expected earnings growth rate of 453.7% for the current year. The Zacks Consensus Estimate for MEOH's current-year earnings has been revised 0.2% upward over the last 60 days.

Tronox: Connecticut-based Tronox carries a Zacks Rank #2 and has a Growth Score of A. It is benefiting from higher sales volumes of titanium dioxide (TiO2) and zircon. Higher customer demand on the back of the ongoing economic recovery is supporting volume growth. Higher TiO2 and zircon prices are also aiding its performance. TROX's regional pricing initiatives are contributing to pricing gains.

Tronox has an expected earnings growth rate of 323.2% for the current year. The consensus estimate for TROX's current-year earnings has been revised 0.9% upward over the last 60 days. The company beat the Zacks Consensus Estimate for earnings in three of the last four quarters while missed once. It has a trailing four-quarter earnings surprise of roughly 15.5%, on average.


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Methanex Corporation (MEOH) : Free Stock Analysis Report
 
Olin Corporation (OLN) : Free Stock Analysis Report
 
Tronox Holdings PLC (TROX) : Free Stock Analysis Report
 
The Chemours Company (CC) : Free Stock Analysis Report
 
AdvanSix (ASIX) : Free Stock Analysis Report
 
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