Bubbling Chemical Names

 | Jun 28, 2012 | 10:30 AM EDT
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Earlier this week, chemical maker H.B. Fuller (FUL) jumped 8.1% to $31.06 in nearly triple its average trading volume. The move followed the company's second-quarter report, which saw the company raise its yearly earnings outlook, boosted by its March acquisition of Forbo Holdings' adhesives unit.

H.B. Fuller shares have been consolidating since mid-May, living below their 50-day moving average for much of that time. Tuesday's action brought it to within 0.5% of that price line. This is a small company, with a market capitalization of $1.5 billion. The stock trades around 373,000 shares per day. As with many smaller stocks, it has a high beta -- 1.47.

The stock is not buyable at the moment due to remaining technical weakness on its own chart and general market selling pressures. Still, here are a number of things to like here.

Fuller's revenue has grown at double-digit rates in the past four quarters, an improvement from single-digit growth in the previous quarters. Earnings per share have increased at year-over-year rates ranging from 24% to 71% in the past five quarters, a turnaround after EPS declines in late 2010 and early 2011.

The chemical industry can be notoriously erratic in terms of fundamental performance. But analysts expect Fuller to earn $2.17 a share this year, up 18% from 2011. In 2013, earnings are pegged at $2.70 per share, which would be a gain of 24%.

While the chemicals business is not one that anybody would classify as glamorous, it can be home to some stocks with potential.

For instance, one low-priced name that I've been tracking for some time is Omnova (OMN), specializes in chemical coatings for textiles and paper products. This is an even smaller company than H.B. Fuller, with a market value of $348 million. It moves just shy of 226,000 shares per day, on average.

The stock has been trending above its short-term five-day exponential moving average, about 5.4% below its 10-month high of $7.97, reached in early May. It has a beta of 1.99, even higher beta than that of H.B. Fuller -- so it's easy to see the degree to which this stock is more volatile than the benchmark index.

Omnova is a good example of the erratic fundamental performance often found in the chemical sub-sector. In the quarter ended March, the company reported a revenue increase of just 1%, following gains of 48% or greater in each of the previous five quarters.

That unevenness is evident in the earnings column, as well, where the two-year EPS results range from a year-over-year decline of 50% to a gain of 92%. Also in the March quarter, the company reported income of $0.22 per share, up 47% from the year-earlier quarter.

Most recently, after Wednesday's close the company reported adjusted earnings from continuing operations of $0.16 per share -- a penny over analyst expectations. Revenue, at $307.5 million, was shy of the $317 million target.

If Omnova vaults higher on the earnings beat, market conditions will determine when -- or if -- I decide to enter the stock. However, with the market in its current "undecided" mode, I continue to remain mostly in cash, and I'm avoiding new buys for now. 

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