A Pop in Plastics

 | Oct 25, 2012 | 2:30 PM EDT
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Let's face it: It's not 1967, and "plastics" is not exactly the one word that comes to investors' and traders' minds when they are seeking fast-moving stocks.

Yet, some of Wednesday's best gainers hailed from the plastics industry. PolyOne (POL), for instance, gapped 9% higher in monster volume. The company, a maker of polymers and other materials used in the plastics industry, beat third-quarter earnings views, although it missed on the top line. The Ohio-based company said it expected double-digit earnings growth in the fourth quarter.

What really grabbed investor attention, however, was PolyOne's $250 million acquisition of Spartech (SEH), a Missouri-based outfit that makes plastic products for a variety of industrial applications. PolyOne said the acquisition would be accretive to earnings in the first full year.

PolyOne has market capitalization of around $1.6 billion, and it trades 426,000 shares per day on average. As with many small-cap names, PolyOne is volatile, with a beta of 1.64. It vaulted out of consolidation on Wednesday's news, and was perched just barely in buy range mid-session, with a gain of 4.2% above its Sept. 14 session peak of $17.53.

It would not be surprising to see a post-gap pullback, which could give traders another opportunity to grab shares. However, be cognizant of the wider market correction, which usually adds downside risk to any given trade.

Another strong performer from the ranks of small-cap plastics makers is AEP Industries (AEPI). The New Jersey-based company rallied to an 11.5-year high last week, and then pulled back to find support at its 15-day exponential moving average.

AEP also had deal news this week, albeit quite small. On Monday, it said it would purchase the plastic films business from Canada's Transco Plastics for $5.3 million. AEP expects the deal to result in a gain of $30 million in net sales.

AEP technically falls under the definition of a small-cap name, with a market capitalization of $354 million. It's thinly traded, moving only 33,000 shares per day on average.

In terms of a potential buy opportunity, AEP is a bit frothy for my liking. The stock is working on its fifth month in a row of upside trade, and could use a consolidation of several weeks or even months at this juncture.

A better-known firm with exposure to the plastics industry is Eastman Chemical (EMN). The mid-cap hit resistance below $60 on two occasions in September and October, and shares are currently holding above support at $53.93. If the general market correction steepens, Eastman Chemical could slice through that support.

Analysts see double-digit earnings gains for the next two years, and the company is a dividend-payer. These are elements that could make Eastman attractive for investors.

The stock closed Wednesday at $54.46, 5% above its 200-day moving average. It last fell below that line in early June, while it was basing prior to a three-month rally.

The company is due to report its third quarter after the close Thursday. Analysts have pegged earnings at $1.42 a share on revenue of $2.36 billion. Those would constitute year-over-year increases.

Eastman Chemical beat views in three of the past four quarters. 

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