Investors have favored the stocks so far in 2002: Through July 5, S&P's Commodity Chemicals subindex rose 4.7%, vs. an 18.9% decline in the S&P 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600). And while shares of many outfits in the chemicals industry's other segments declined in 2001, the commodity group posted a strong performance, rising 8.5% while the 1500 lost 11.8%.
Despite the recent gains, S&P analyst Richard O'Reilly doesn't see any catalysts for the stocks in the near term and has a neutral outlook for the group. His reasons? Fundamentals in key products are still weak, despite initial signs of an economic recovery, he says.
CONTINUING CONSOLIDATION. O'Reilly notes that commodity-chemical producers saw seasonally stronger business conditions in 2002's second quarter, partly because of customer inventory rebuilding and rising selling prices for many petrochemicals, plastics, and inorganic chemicals. Since chemical production is energy-intensive, producers have benefited from energy costs' sharp decrease from early 2001. But prices began to move higher again late in the first quarter of 2002, and this will limit margin improvements.
Assuming plant operations continue at normal levels and recently added ethylene production capacity is absorbed, O'Reilly doesn't see a sharp cyclical recovery in the petrochemicals industry. He thinks the industry's consolidation trend will likely continue as part of an effort to reduce costs.
Reflecting his neutral stance on the group, O'Reilly ranks both Georgia Gulf (GGC
) and Lyondell (LYO
), the two stocks that make up the Commodity Chemicals index, 3 STARS (hold).
S&P Relative Strength RankingsThese industries carry 12-month relative strength rankings of "5" as of July 12, 2002 -- meaning that they're in the top 10% of the 114 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.
Largest Company (Market Cap.)
S&P STARS* Rank
Air Freight & Logistics/Industrials
Catalog Retail/Consumer Discretionary
Insight Enterprises (NSIT)
Consumer Electronics/Consumer Discretionary
Harman International (HAR)
Barrick Gold (ABX)
Housewares & Specialties/Consumer Discretionary
Fortune Brands (FO)
Managed Health Care/Health Care
Metal & Glass Containers/Materials
Specialty Stores/Consumer Discretionary
Barnes & Noble (BKS)
Yellow Corp. (YELL)
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief sector strategist for Standard & Poor's