3 Chemical Growth Stocks to Revitalize Your Portfolio

The chemical industry's upturn is expected to continue this year on an improving US economy, strong momentum in the automotive space, and continued healing across housing and commercial construction markets. Against that backdrop, these 3 stocks could make prudent investments.

The chemical industry is gradually gaining strength after being badly shaken by the global economic crisis. The highly cyclical industry—which had long been out of favor—is finally looking up, making it an attractive investment proposition for 2015.

The industry got off to a positive start in 2015 as the March quarter showed healthy demand trends for chemicals across key markets, and continued recovery in commercial construction—an end-market that has long been a weak link.

While the outlook for the European chemical industry appears foggy given sluggishness in some of the region’s major economies, high energy costs, and declining investments, prospects in the US look healthy—driven by a gradually convalescing economy, strength in the automotive space, a recovery in the construction market and increasing investments in shale gas-linked projects.

The American Chemistry Council (“ACC”) envisions national chemical production to rise 3.7% in 2015 and 3.9% in 2016. The trade group also sees domestic chemical sales to cross the $1 trillion milestone by 2019.

Chemical companies continue to shift their focus on attractive, growth markets (driven by megatrends) such as agriculture and health and nutrition in an effort to cut their exposure on other businesses that are grappling with weak demand and input costs pressure. The industry is also seeing a pick-up in consolidation activities as chemical makers increasingly looking to diversify their business.

The shale gas boom in the US has also been a huge driving force behind chemical investment on plants and equipment in the country. The shale revolution has made the US an attractive investment hotspot and incentivized a number of chemical companies to invest billions of dollars to beef up capacity.

According to the ACC, domestic chemical investment related to shale gas has reached as high as $138 billion, over 60% of which is from firms outside of the US. Such investments—many backed by Federal government support—are expected to boost capacity and export over the next several years.

Moreover, the automotive sector continues to "accelerate." This major chemical end-use market is enjoying the fruits of low gasoline prices. In particular, US light vehicles (a key market) sales are expected to rise this year, riding on an improving job market, lower fuel prices, attractive financing options and pent-up demand.

A rebound across housing and non-residential construction has been another supporting factor for the chemical industry recovery. After being hit hard in the recession, the construction industry is gradually on the mend, further manifested by better-than-expected housing data for April. The recovery momentum is expected to continue moving ahead, which augurs well for chemical demand in this key market.

3 Chemical Growth Plays

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 substantial growth. With the help of our new style score system, we have picked 3 standout stocks that have excellent prospects and might offer solid investment returns.

Our research shows that stocks with Growth Style Scores 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.

LyondellBasell Industries NV (LYB - Analyst Report)

Netherlands-based LyondellBasell has a Zacks Rank #1 and a Growth Score 'B.' LyondellBasell remains on track with its ethylene expansion projects across its Channelview, La Porte and Corpus Christi facilities in Texas to leverage the U.S. natural gas liquids (NGLs) advantage. The expansion program, when in full swing, is expected to expand the company’s annual ethylene capacity by as much as 2.3-2.4 billion pounds in North America.

LyondellBasell has delivered positive earnings surprises in the last 4 quarters, with an average beat of around 18.3%. The stock has a long-term expected earnings per share (EPS) growth rate of roughly 7.8%.

Celanese Corporation (CE - Analyst Report)

Our next pick in the space is Texas-based Celanese, armed with a Zacks Rank #1 and Growth Score 'B.' The company has surpassed expectations over the last four quarters with an average earnings surprise of 17.3%. Its long-term projected EPS growth rate is 7.2%.

Celanese remains focused on reducing costs and running its plants more efficiently amid a still challenging operating backdrop. It is also aggressively expanding its capacity in the emerging markets. Celanese is constructing a methanol plant at its Clear Lake acetyl complex with an annual capacity of 1.3 million metric ton. The company’s expansion and productivity improvement initiatives are expected to support earnings growth.

Stepan Company (SCL - Snapshot Report)

Lastly, Illinois-based Stepan is another attractive choice with a Zacks Rank #1 and Growth Score 'A.’ The stock delivered a healthy positive earnings surprise of 32.4% in the last reported quarter. This specialty and intermediate chemicals maker is taking steps to cut costs through its efficiency program and other strategic initiatives, which should lead to higher earnings. It should also gains from lower costs of petroleum-based raw materials, which should help drive margins across its surfactant and polymer businesses.

Wrapping Up

While the chemical industry still remains buffeted by a slowdown in China and sluggishness in some parts of Europe, the industry’s upturn is expected to continue this year on an improving US economy, strong momentum in the automotive space, and continued healing across housing and commercial construction markets.

Amid such a backdrop, it would be prudent idea to invest in the above-mentioned stocks with strong growth prospects if you are looking to reap solid returns from your portfolio.

This article originally appeared at Zacks.com. Reprinted with permission.

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