Even in times of serious volatility, the chemical industry has been one of the most stable and consistent dividend paying segments of the economy during the past few years. However, in the last two months, the Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), has turned negative and shown declines of 0.1% and 0.3% in July and August respectively after remaining up by 0.5% in May and June. Although the CAB was still up 1.8% year-over-year on August 25, according to the Chief Economist at ACC, Kevin Smith, it is pointing towards “slow gains in business activity into the early part of 2016”. For an investor keeping track of the trends in an industry is important, but equally if not more important is to keep a track on what smart money thinks of companies from the particular industry. To figure that out, we decided to go through the recent 13F filings submitted by over 700 hedge funds we track and uncover three most popular chemical industry stocks among hedge funds heading into the third quarter, which we will be revealed further in this article.
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We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by over 60 percentage points (118% return vs. S&P 500’s 57.6% gain) over the last 36 months (see the details here).
3. Eastman Chemical Company (NYSE:EMN)
Investors with Long Positions (as of June 30): 39
Aggregate Value of Investors’ Holdings (as of June 30): $1.368 Billion
The Eastman Chemical Company (NYSE:EMN)’s stock had a terrific rise of 18.7% during the second quarter, which perhaps explain why the number of hedge funds that held the stock went up by one and the aggregate value of hedge funds’ holdings jumped by $195 million during this period. However, despite that significant appreciation during the April-June period, the stock has dropped significantly in the past two months and are now trading 8.2% in red in year-to-date terms. The company has consistently increased its quarterly dividend during the past six years and its annual dividend yield currently hovers around 2.30%. Though the company’s sales on a constant currency basis are growing at around 8%, the appreciation of the dollar can have a significant impact on its top line results because it operates 45 plants in 16 countries and 57% of its revenues come outside the United States. Analysts have also raised concerns over the very high debt of $7.323 billion the company currently carries on its balance sheet. Meanwhile, David Cohen and Harold Levy‘s Iridian Asset Management inched up its stake in Eastman Chemical Company (NYSE:EMN) by 10% to over 4.83 million shares during the April-June period and continued to remain its largest shareholders among the hedge funds we track.
2. Dow Chemical Co (NYSE:DOW)
Investors with Long Positions (as of June 30): 65
Aggregate Value of Investors’ Holdings (as of June 30): $5.85 Billion
The second-largest chemicals company in the world in terms of revenue, Dow Chemical Co (NYSE:DOW), was also the second most popular chemical stock among hedge funds at the end of the second quarter. Just like Eastman Chemical Company (NYSE:EMN), the stock of Dow Chemical Co (NYSE:DOW) gained ground during the second quarter (up by 7.5%) and, including a correction during the last two months, it has lost 8% since the beginning of the year. However, Dow Chemical Co (NYSE:DOW) gained a significant level of popularity, as the number of hedge funds with a long position went up by nine and the aggregate value of their holdings increased by a whopping $1.76 billion during the second quarter. Although the company posted a 13% annual decline in sales in its most recent earnings report due to currency headwinds and the slump in oil prices, several analysts appreciated that the company was able to increase its operating EBITDA margins by 396 basis points to 19% on the year. On August 24, securities law firm Faruqi & Faruqi, LLP announced that it is investigating the allegations that the CEO of Dow Chemical Co (NYSE:DOW) misused the company’s funds for personal benefits and charities, and whether other officers and Board members breached their fiduciary duties by not disclosing and reporting those transactions properly. Billionaire activist investor Dan Loeb of Third Point, who obtained two Board seats at Dow Chemical Co (NYSE:DOW) last November, increased his stake in the company by 5% to 23 million shares during the April-June period.
1. Air Products & Chemicals, Inc. (NYSE:APD)
Investors with Long Positions (as of June 30): 76
Aggregate Value of Investors’ Holdings (as of June 30): $8.638 Billion
Even after the number of funds with long positions went down by seven, the aggregate value of their investments dropped by almost $1.3 billion, amid a 9% decline of the stock during the second quarter, Air Products & Chemicals, Inc. (NYSE:APD) turned out to be hedge funds’ favorite stock in the chemical industry for the quarter. Hedge funds’ confidence in the stock is resonated by the fact that on a year-to-date basis, Air Products & Chemicals, Inc. (NYSE:APD)’s stock has fallen the least (by 5.11%) among the other companies in this list. Air Products & Chemicals reported EPS of $1.65 on revenue of $2.47 billion for the third quarter of fiscal year 2015, compared to estimates of EPS of $1.58 on revenue of $2.51 billion. On August 4, Global Hunter Securities upgraded the stock to ‘Accumulate’ from ‘Neutral’ and raised its price target to $165 from $152. Last year’s best performing hedge fund manager, Bill Ackman of Pershing Square, who owned over 20.5 million shares of Air Products & Chemicals, Inc. (NYSE:APD) at the end of June, noted in an interim financial statement released recently that he expects the demand for industrial gases manufactured by the company will remain “robust over the long-term.”
Disclosure: None
