Here’s What These Two Chemical Stocks Should Outperform Dow
Like many other market
sectors that have been negatively affected by the
uncertainty of war, the chemical industry has seen its stock prices hit new lows
for the year. This is primarily due to the industry’s high dependence on energy
for the production of its goods. As a result, many investors expect the
chemicals to rebound nicely, should a war with Iraq prove to be short and
successful–once energy prices fall back to earth.
Gulf War…
After Saddam first invaded Kuwait in 1990, the
chemicals fell by 8% until the Gulf War started in February 1991. Six months
later, the chemicals were up 22%.
Present Day…
This time, however, not all energy prices are
expected to remain low for very long after a war. As I mentioned
yesterday, the supply of oil is expected to correct significantly after the
war, and prices should stay in the low 20s, as the US looks to maximize its
production of oil in Iraq to pay for the war.Â
Natural gas prices, on the other hand, are
expected to move higher from any post-war correction, due to supply constraints.
For this reason, investors need to filter out the companies that are more
dependent on natural gas from those that are more dependent on oil.
Dow Chemical
(DOW),
for instance, is more more dependent on natural gas to produce ethylene than
some of its peers. DuPont (DD)
and PPG (PPG)
are more dependent on oil and less on natural gas for production. As such, these
two companies should outperform Dow in any rebound in stock price.
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