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5 Top Specialty Chemical Stocks to Snap Up on Demand Upturn

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·8 min read
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The specialty chemical industry reeled under the effects of significant demand contraction during the first half of 2020 as a result of a slowdown in industrial activities amid the global health crisis. Shutdowns and travel restrictions to blunt the spread of infection paralyzed industrial and economic activities globally, squeezing demand for specialty chemicals across major end-use markets.

Nevertheless, the specialty chemical industry has bounced back from the pandemic-led slowdown on a pick-up in demand in key markets and a strong economic rebound in China (a top consumer). Demand for specialty chemicals started to pick up from the third quarter of 2020 with a rebound in global economic activities.

Notably, specialty chemicals that include catalysts, surfactants, specialty polymers and coating additives have application in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics. Automotive, construction, textile, food & beverages, electronics, energy and agriculture are among the major markets for these chemicals.

The automotive sector has made a speedy recovery, following the pandemic-led slump on the back of a strong rebound in customer demand for new vehicles. Global automotive production has rebounded from shutdowns due to significant disruptions in supply chains resulting from coronavirus.

The recovery of the automotive industry that started in the second quarter of 2020 gained momentum in the third quarter on an uptick in demand. Notably, U.S. auto sales started to rebound in the second half after hitting a coronavirus-induced low in April 2020. Low auto loan interest rates and increasing preference for private transportation due to health, safety and social distancing concerns contributed to a pick-up in U.S. auto sales.

The National Automobile Dealers Association (“NADA”) expects U.S. new-vehicle sales to rise 7.2% year over year to 15.5 million units in 2021, factoring in low interest rates, a gradual return of fleet demand for new vehicles, consumer preferences for personal vehicle ownership over rideshare services and potential economic boom in the second half once vaccination is widely available and Americans are able to get back to work.

Moreover, the construction sector has recovered on the heels of the restart of projects that were stalled earlier partly due to supply chain disruptions. Residential construction is picking up around the world, supported by lower interest rates. Notably, the U.S. housing sector has witnessed a strong recovery, backed by record-low borrowing costs and higher demand for new properties due to the rising trend of work from home in the wake of the pandemic. The Federal Reserve’s dovish monetary stance and lower mortgage rates bode well for U.S. housing.

As these major markets recover, demand for specialty chemicals is expected to go up moving ahead. Higher automotive production and a resilient construction sector are expected to spruce up demand for paints and coatings.

Meanwhile, the U.S manufacturing sector has staged a strong rebound from the coronavirus blues with activities showing a V-shaped recovery on an upturn in the overall economy and strong demand. U.S. manufacturing activities expanded at the fastest pace in three years in February 2021 on the back of a spike in new orders. Meanwhile, the United States has ramped up the national rollout of vaccines. Vaccination of a sufficient number of people will allow the U.S. economy to fully open up, which would augur well for the manufacturing sector.  

Moreover, the recovery in China’s manufacturing sector continues to gather momentum on strong domestic consumption and growth in export orders buoyed by higher overseas demand. China’s official manufacturing purchasing managers’ index expanded to 51.9 in March from 50.6 in February, per National Bureau of Statistics. A reading above 50 indicates expansion in activity. The momentum in manufacturing is expected to continue on the heels of global economic recovery and China government’s efforts to boost domestic consumption.

Manufacturing activity is a key indicator for chemical demand. Thus, the rebound in manufacturing augurs well for the U.S. specialty chemical industry.

Favorable Industry Rank

The Zacks Chemicals Specialty industry currently carries a Zacks Industry Rank #109, which places it at the top 43% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

5 Stocks Worth Betting On

The specialty chemical industry has crawled out of the coronavirus impact and is poised to run higher on a strong rebound in global industrial and manufacturing activities. A revival in demand across major end-markets represents a tailwind for the industry. As such, it would be prudent to zero in on stocks in the space that have compelling prospects.

We highlight the following five stocks with a solid Zacks Rank that are good options for investment right now. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Daqo New Energy Corp. DQ

China-based Daqo New Energy sports a Zacks Rank #1. The company is expected to gain from higher production and sales volumes for polysilicon. Its facilities are currently running with increased efficiency, which is likely to drive production volumes. The company’s efforts to improve its cost structure are also likely to lend support to its margins. Its energy efficiency efforts and enhanced manufacturing efficiencies are leading to lower costs.

The company has an expected earnings growth rate of 204.1% for the current year.  Moreover, the Zacks Consensus Estimate for current-year earnings has been revised 39.8% upward over the last 60 days. Its shares have also soared around 154% over the past six months.

Ashland Global Holdings Inc. ASH

Kentucky-based Ashland sports a Zacks Rank #1. The company’s restructuring actions have provided it with a diverse business portfolio focused on high quality markets and better positioned it for future growth. The company is also taking a number of actions including reduction of operating costs to boost profitability. Cost-reduction measures are expected to support its margins in fiscal 2021. Its industrial businesses are also witnessing strong demand recovery.

Ashland has an expected earnings growth rate of 83.2% for the current fiscal year. Moreover, the consensus estimate for earnings for the current fiscal has been revised 27% upward over the past 60 days. Its shares have also gained around 25% over the past six months.

Element Solutions Inc ESI

Based in Florida, Element Solutions carries a Zacks Rank #2. It is expected to gain from healthy demand in its high-end electronics business and the strong rebound in the automotive industry. The company also remains focused on growing through strategic acquisitions. It is also implementing a number of cost-containment measures including reduction of traveling costs. These actions are likely to lend support to its margins.

The company has an expected earnings growth rate of 24% for 2021. The Zacks Consensus Estimate for earnings for 2021 has also been revised 6.3% upward over the past 60 days. The company also surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 15.9%. Its shares have also surged roughly 67% over the past six months.

Celanese Corporation CE

Texas-based Celanese has a Zacks Rank #2. It is expected to benefit from its productivity measures, investments in high-return organic projects and strategic acquisitions. The company is also seeing a recovery in demand across most of its end markets. Moreover, Celanese continues to actively pursue acquisitions, which are providing it opportunities for additional growth, investment and synergies.

The company has an expected earnings growth rate of 46.1% for 2021. The consensus estimate for current-year earnings has been revised 17.6% upward over the last 60 days. The company surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 15.2%. Moreover, its shares have rallied around 38% over the past six months.

Kraton Corporation KRA

Texas-based Kraton carries a Zacks Rank #2. The company is expected to benefit from demand recovery in its Polymer and Chemical segments. Improved demand in durables and automotive applications is expected to drive Specialty Polymers sales volumes. Its Performance Products business is also benefiting from favorable demand trends in paving and roofing and adhesives applications. Benefits of cost-saving actions are also likely to reflect on the company’s margins.

Kraton has an expected earnings growth rate of 64.3% for the current year. The Zacks Consensus Estimate for current-year earnings has also been revised 11.6% upward over the last 60 days. The company surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 310.5%. The stock has also surged 93% over the past six months.

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Element Solutions Inc. (ESI) : Free Stock Analysis Report
 
Ashland Global Holdings Inc. (ASH) : Free Stock Analysis Report
 
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DAQO New Energy Corp. (DQ) : Free Stock Analysis Report
 
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