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1:26 PM MST | December 21, 2011 | By VINCENT VALK
After working on CW’s first-ever ranking of institutional investors in the chemical industry, it was rather interesting to go to a Societie de Chimie Industrielle meeting last week in New York where the theme was chemical stocks. Buckingham Research analyst John Roberts – who gives advice to those institutional investors – gave his views on the state of the chemical industry and the stock market.
Roberts opened with an observation that shouldn’t be surprising to anyone – “the macroeconomic environment is unusually uncertain.” He noted that while the stock market is currently discounting a recession, the market has historically “predicted” about twice as many recessions as have actually occurred. “We kicked the can down the road,” Roberts said. “We will probably be talking about this” – ‘this’ meaning the Euro crisis, the Chinese property bubble, and the various other risks to global growth – “again next year.”
I am not entirely sold on the idea that the euro crisis has definitively put off its day of reckoning until 2013. It’s certainly possible that euro zone could muddle along on half-baked bailouts and counterproductive austerity measures for another year. But, sooner or later, the combination of low growth and high debt is going to force either a greater fiscal union or the end of the single currency as we know it. The question is when this will happen, and nobody, really, has any idea – hence the perpetual ‘uncertainty.’
But I digress: Roberts says that chemical companies with new products, a large presence in emerging markets, or those who can grow through acquisition are good bets. I hear about the first two a lot, but the third is worth expanding on a bit. Companies like Airgas and Sherwin-Williams, Roberts said, get about half their earnings from using cash on hand to roll up the fragmented markets they operate in – industrial gas distribution and retail paints, respectively. Ecolab, which controls about 10% of the market in sanitation chemicals, is another candidate to be a consolidator, according to Roberts.
In any event, you may want to be careful with your investments: as Roberts noted at the event, “there is no data that supports any investor outperforming the market for any substantial period of time. There are always people that do, but you would expect that in any random distribution.” Better, perhaps, not to try.