Pocket a Few Chemical Makers

 | Jun 14, 2012 | 8:00 AM EDT  | Comments
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Stock quotes in this article:

pot

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iosp

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kwr

Sometimes the mundane can make for desirable investments, and that certainly applies to commodity products. Folks frequently overlook these precisely because they are commodities, and rather dull -- but, nonetheless, many of these are very solid businesses and are worth a look.

At the moment, I am looking at companies in the chemical-manufacturing industry. Such chemicals are generally commodities, and yet my guru strategies have identified several of them as attractive investments. The computerized strategies I use to choose stocks, which I call "guru strategies," are based on the investment approaches of some of Wall Street's greatest minds -- and, right now, chemical manufacturers are in favor. In particular, these companies would be well worth your consideration: Potash (POT), Innospec (IOSP) and Quaker Chemical (KWR).

Potash is the world's largest fertilizer company by capacity, and it's the world's leading potash producer. In addition to potash, the company also produces phosphate and nitrogen. A strategy I base on the thinking of Peter Lynch has given Potash very high grades. This strategy stresses the P/E/G ratio, which is price-to-earnings relative to growth -- a measure of how much an investor would be paying for growth. A P/E/G of 1.0 or less is acceptable, while below 0.50 is considered especially strong -- and Potash sports a reading of 0.49. In addition, management is doing a good job of overseeing the company's inventories.

I've also automated a strategy based on Wall Street columnist, money manager and strategist Kenneth Fisher, and this one likes Innospec. A specialty-chemical maker, Innospec manufactures automotive fuel additives, chemicals used in oil well operations, octane additives as well as other specialty chemicals.

The Fisher strategy stresses the price-to-sales ratio, which is a measure of how good a value a stock is. The desirable range is between 0.4 and 0.8, and Innospec just makes it with a P/S ratio of 0.79. Further, the company has a low level of debt in relation to its equity, positive free cash flow per share and an inflation-adjusted EPS of 32.7%, more than double the Fisher strategy's minimum of 15%.

Like Potash, Quaker is a Lynch strategy favorite. The company sells lubricants, hydraulic fluids and corrosion inhibitors to automotive, steel finishing, heavy equipment, aerospace and other industrial clients. Quaker's P/E/G is even more favorable than that of Potash, coming in at 0.38. As with Potash, Quaker is also managing its inventories quite well.

These companies are unlikely to ever produce a product as eye-popping as an Apple (AAPL) iPad or a Corvette, but don't let that convince you these are dull choices for your portfolio.

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