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Investing  | January 14, 2021

The chemicals industry lies at the center of the production, manufacturing and industrial boom worldwide. The sector provides industrial chemicals that feed the global production, construction, consumer products manufacturing and plastics. The chemicals industry also converts raw materials to over 70,000 different products. The industry is notorious for its cyclical nature, and was hammered badly by the coronavirus crisis. As the world came to a screeching halt, production and manufacturing crashed worldwide, resulting in massive revenue declines for top chemical companies in the U.S. and abroad. But a strong recovery is on the horizon as the world prepares to reopen following the availability of COVID-19 vaccines.

A Strong Recovery in the Chemicals Industry

Deloitte believes the chemical industry revenues are expected to grow about 8% in 2021 after facing a decline of 9% in 2020. Operating income of the industry is expected to jump by almost 17% in 2021 after an expected 14% decline in 2020. The report noted that although the chemical industry had to let go almost 2% of its entire workforce during the peak pandemic period, the demand for R&D experts, engineers and chemical researchers is growing as chemical companies rethink their product strategies and prepare to adapt to the rapidly changing industry demands. Top chemical companies will shift their focus to areas like healthcare, microelectronics, advanced materials for construction, recycling technologies, new solvent cleaning technologies and electric vehicles, the report said. Deloitte found in a survey that 64% of chemical executives believe that advanced chemicals and materials for construction applications will likely drive most of the industry’s growth in 2021. These emerging trends will fuel growth of chemical stocks in 2021. The firm also believes that an uptick of growth and manufacturing activity in China will prove to be a tailwind for U.S. chemical companies in 2021. It is also expected that the Biden administration will end the trade dispute with China, which negatively affected chemical companies due to tariffs and restrictions.

According to a report by the American Chemistry Council, the U.S. economy is expected to grow 3.7% in 2021, while chemical production will jump by 3.9% as many industries will need chemicals for manufacturing and related economic activity.

Should You Invest in Chemical Stocks in 2021?

Why should you invest in the chemical industry in 2021? The primary reason is the resilience and strong track record for chemical stocks in the past. A McKinsey report found that on the total returns to shareholders, the chemical industry outperformed the market along with most of the customer industries and raw-material suppliers. The report said that the key reason behind this trend is the industry’s ability to significantly increase earnings on a base of total revenues and invested capital. Another factor is China, which has an insatiable demand of chemicals on the back of strong manufacturing and economic growth.

It's extremely important to conduct due diligence before investing your money as financial markets are becoming volatile. Even the so-called experts are struggling to stay on top of the changing market dynamics. The hedge fund industry’s reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017. We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

But the most important factor that makes the chemical industry always ripe and evergreen for investment is the nature of the chemicals business. The report said that chemical companies deal in the “world of things.” Everything around us — buildings, food items, cosmetics, furniture, cars, computers — has some kind of chemicals in it.

Without further delay let's take a look at 10 best chemical stocks to buy for 2021. We used 13F data revealed by top hedge funds and fundamental growth catalysts of major chemical companies as our ranking criteria.

10. HB Fuller Co (NYSE: FUL)

H.B. Fuller Company ranks 10th on the list of 10 best chemical stocks to buy for 2021. The company supplies industrial adhesives worldwide, and is famous for responsible and ethical practices such as proper handling of toxic waste and preserving nature. The stock was upgraded recently by Robert W. Baird to Outperform from Neutral, with a price target of $65.

In the third quarter, H.B. Fuller posted an EPS of $0.76, beating the Street’s estimates by $0.06. Revenue of $691.46 million also surpassed the Wall Street’s forecasts by $17.38 million.

Mario Gabelli’s GAMCO Investors is one of the top shareholders of H.B. Fuller, with 548,176 shares of the company, as of the end of September.

9. Tronox Holdings PLC (NYSE: TROX)

TROX ranks 9th in our list of the 10 best chemical stocks to buy now. Connecticut-based Tronox primarily deals in titanium products, as it is the largest fully integrated seller and marketer of titanium dioxide (TiO2) pigment, which is used to enhance brightness in coatings, plastics and paper. The company is also the second-largest producer of zircon, with approximately 20% of global production.

In October 2020, Tronox shares rallied about 14% after the company reported a 17% jump in its third-quarter revenue, as titanium dioxide sales jumped 16%. Feedstock and other products sales increased a whopping 73% sequentially, driven by pig iron and CP slag sales.

As of the end of the third quarter, 19 hedge funds tracked by Insider Monkey held positions in Tronox.

8. Albemarle Corporation (NYSE: ALB)

Albemarle Corporation stands 8th in the list of best chemical stocks to buy for 2021. The company is based in North Carolina, and operates 3 divisions: lithium, bromine specialties and catalysts. The biggest growth catalyst for Albemarle is its lithium batteries business amid huge demand in EV batteries in the near future. The stock was recently upgraded by Evercore ISI analyst Stephen Richardson, who cited “electrified future” for the company’s improving outlook. The analyst also increased the stock price target to $160 from $86.

Dmitry Balyasny’s Balyasny Asset Management is one of the 27 hedge funds having stakes in Albemarle, as of the end of the third quarter. These hedge funds collectively own $112.81 million worth of Albemarle shares entering the fourth quarter of 2020.

7. Eastman Chemical Company (NYSE: EMN)

Eastman Chemical ranks 7th on the list of the 10 best chemical stocks to buy for 2021. The Tennessee-based company makes additives & functional products, advanced materials, chemical intermediates and fibers. In the third quarter, Eastman reported an adjusted EPS of $1.57, beating the analysts’ forecasts by $0.20. Revenue of $2.12 billion was also ahead of the estimates by $50 million. Adjusted EBIT totaled $310 million. The company’s CEO Mark Costa said in the third-quarter earnings call that Eastman is facing a demand recovery across 10 markets, resulting in 10% higher sales revenue and almost 60% higher adjusted earnings sequentially.

A total of 27 hedge funds tracked by Insider Monkey held $183.97 worth of stakes in Eastman, as of the end of the third quarter.

6. LyondellBasell Industries NV (NYSE: LYB)

LYB is among the largest chemical companies in the world. LyondellBasell is a Netherlands-based chemicals company that was formed in December 2007 as a result of the acquisition of Lyondell Chemical Company by Basell Polyolefins for $12.7 billion. LyondellBasell is one of the biggest producers of polyethylene and polypropylene technologies, ethylene, propylene, polyolefins, and oxyfuels. In the third quarter, the company posted a non-GAAP EPS of $1.27 that beat the Street’s estimates by $0.14. Revenue in the quarter came in at $6.78 billion, above the analysts’ forecasts.

Boykin Curry’s Eagle Capital Management is one of the 31 hedge funds that held positions in the chemicals company as of the end of the third quarter. The fund owns 3,524,959 shares of the company, worth $248.47 million.

5. W R Grace & Co (NYSE: GRA)

WR Grace is  a Maryland-based company that produces specialty chemicals and materials with a particular focus on catalysts and specialty silica. The current W. R. Grace emerged from Chapter 11 bankruptcy after the original, which was founded in 1854, went bankrupt due to asbestos litigation. The company has a strong market presence, with around 80% of revenue garnered from segments where the company ranks first or second, and a competitive advantage with its considerable patent trove, high barriers of entry, its customer intimacy, long-term partnerships, and broad, highly differentiated portfolio of products. There has also been some speculation that W. R. Grace could be a potential target for Honeywell in the past, although nothing has come out from it.

In terms of the long thesis, many elite funds like GRA for its organic growth prospects, its potential for solid margins, and the company’s status in an industry with few players that have displayed pricing power. Although GRA’s stock performance has lagged some of its peers due to some delays and margin pressure, many bulls believe it is only a matter of time before those issues dissipate and GRA shares begin closing that gap. Moreover, GRA’s near ‘pure-play’ status as a catalyst producer could make it an M&A target in the eyes of some funds.

The company said in September 2020 that it expects a strong improvement and growth in sequential sales for the fourth quarter of 2020. The company is seeing a growing demand in specialty catalysts and materials technologies. In the third quarter, it posted a non-GAAP EPS of $0.56, which beat the Street’s forecast by $0.03. Adjusted gross margin in the period jumped by 410 basis points sequentially.

As of the end of the September quarter,  David S. Winter And David J. Millstone’s 40 North Management owns 9,865,008 share of Grace, worth $397.5 million. Overall, 39 hedge funds tracked by Insider Monkey had positions in W.R. Grace entering the fourth quarter.

4. Dow Inc (NYSE: DOW)

Michigan-based Dow  ranks 4th on the list of 10 best chemical stocks to buy for 2021. The company, which has a market cap of over $41 billion, was given a strong rating by J.P. Morgan on the back of strong growth prospects in the polyethylene market. The firm upgraded Dow stock to Overweight from Neutral, and upped its price target to $60 from $47.

The stock has gained over 15% in the last 3 months.

Smart money loaded up on Dow stock in the third quarter, as 42 hedge funds in our database ended the period with Dow shares in their portfolios, up from 35 funds a quarter earlier. The total value of these stakes is $512.4 million. Here is what Evermore Global said about DOW and DD in its 2020 Q1 investor letter:

“With respect to Corteva, Dow and DuPont, COVID-19 related shutdowns that started in China painted an ominous picture for the global macro landscape, and we exited our positions in these three companies that comprised the former DowDupont (DWDP) beginning in February. Additionally, numerous channel checks we performed indicated that various supply chains were being disrupted and stressed, a poor sign for three companies that are very global in nature.

In retrospect, we remain generally happy with managements execution of many of the fundamental tenets of our original investment thesis in DWDP – the separations and spins were completed on time, the restructuring programs were well executed, and capital allocation across the three companies is much more streamlined and shareholder friendly today than in the past. Unfortunately, big picture issues that started with the U.S. – China trade war and remain today with the global collapse in macroeconomic activity has severely impacted each of the former DWDP companies. We will continue to remain close to each company and could reenter on or more of the aforementioned positions should an opportunity present itself.”

3. Chevron Corporation (NYSE: CVX)’s Chemical Business

Chevron Phillips Chemical Company is a chemicals company jointly owned by oil giant Chevron and Texas-based Phillips 66. In 2019, it was reported that Chevron Phillips was planning to acquire Canadian chemical company Nova Chemicals for about $15 billion. However, the deal could not materialize.

Chevron Phillips is a major producer of key chemicals like ethylene, propylene, polyethylene, Alpha-olefins, Polyalphaolefins and other specialty chemicals.

Ken Fisher’s Fisher Asset Management is one of the 43 hedge funds having stakes in Chevron, as of the end of the third quarter. The fund owns 5,428,944 shares of the company, worth $390.88 million. Here is what we wrote about CVX recently:

“2021 looks to be shaping up as a year where there will be steady progress against the pandemic and I think it will end much better than it begins.” Mike Wirth, the current Chairman, and CEO of Chevron seem to have a positive outlook for energy demand in the current year. In an interview with Bloomberg, Wirth said the pandemic made everyone stay in their places, travel restrictions are everywhere and so there has been little to almost no demand for oil but he views 2021 with full optimism. With the vaccine being just around the corner, he thinks that people will start to move around and this will result in a gradual increase in demand for oil and energy.

Chevron (NYSE:CVX) recently acquired Noble Energy (NASDAQ: NBL) and for Wirth, “Together, we’re better than before.”. Noble Energy is also a very strong energy company that operates offshore Israel, the west coast of Africa, and onshore in top basins covering the U.S. of America. The recent acquisition aims to make the company stronger to attract more investors and to bring more investments in the company.”

2. Exxon Mobil Corporation (NYSE: XOM)

ExxonMobil Chemical Company is a chemicals division of the oil giant Exxon. The company makes a diverse range of chemical products that are used in packaging materials, plastics, cars, rubbers, and many other consumer goods. ExxonMobil’s chemicals business is currently under pressure amid trade tensions with China and a global supply glut. The company has a 9% share in the global production capacity of polyethylene but the segment is facing declines amid overproduction. However, with a giant like Exxon on its back, the division is expected to overcome the temporary difficulties in 2021. Goldman Sachs recently upped its price target for Exxon to Buy from Neutral, and also increased its price target to $52 from $42.

Out of the 816 elite hedge funds tracked by Insider Monkey, 52 ended the third quarter with positions in ExxonMobil. The total worth of these stakes is $1.38 billion. Here is what First Eagle said about XOM in its 2020 Q3 investor letter:

“The stock of Exxon Mobil continued to struggle in the third quarter, and it lost roughly half its market cap year to date. Despite this, we believed Exxon Mobil was well-equipped to contend with lower prices and remained a compelling investment. The company demonstrated high levels of operational flexibility during the difficult market environment and maintained an upward drift in earnings power. Its high-quality, long-duration assets occupy attractive positions on the cost curve.”

1. DuPont de Nemours Inc (NYSE: DD)

DuPont de Nemours Inc (NYSE: DD) is a chemicals behemoth that was formed as a result of a merger between Dow Chemical and E. I. du Pont de Nemours and Company in 2017. In November 2020, Bank of America gave a bullish rating to DuPont along with some other materials stocks on the back of an improving long-term outlook. The company in October posted better-than-expected Q3 earnings and a strong guidance. DuPont expects its full-year EPS to come in the range of $3.17-$3.21 versus the consensus estimate of $3.03. Revenue in the period is expected at $20.1 billion -$20.2 billion, while analysts are projecting a revenue of $20.18 billion.

DuPont tops the list of 10 best chemical stocks to buy for 2021 as 61 hedge funds tracked by Insider Monkey held stakes in the company as of the end of the third quarter. Here is what Rhizome Partners said:

“Three out of four DuPont segments reported EBITDA margins of 27‐31%. The remaining segment suffered an 86% decline in EBITDA due to its exposure to auto and industrials. In aggregate, DuPont’s Q2 EBITDA declined by 14% versus the same quarter in 2019. This is a testament to DuPont’s portfolio of specialty products that can command pricing power even during the worst of the times.”

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