12 Exceptional Investments In The Process Industries Sector

Introduction

One of the main goals of this series of articles is to illustrate the significant differences between individual stocks, and the significant differences between different sectors. Therefore, from this perspective, I have been attempting to illustrate the “nature of the beast” for each of the sectors I have covered. The Process Industries Sector as reported by FactSet does consist of companies that are cyclical in nature. However, just as we’ve seen with other sectors, some are more cyclical than others.

Moreover, cyclicality is an attribute that can be problematic for many investors, but not necessarily a long-term negative. To clarify that statement, every research candidate except for one (International Paper) covered in this article has dramatically outperformed the S&P 500 on both dividend income and total return over the long run. However, that exceptional performance has not always been a smooth ride relative to the cyclical nature of these companies’ operating histories. Consequently, I feel comfortable stating that being a long-term investor in cyclical companies such as those covered here can be very challenging. Therefore, many investors might lack the fortitude to be able to stay the course during those times when earnings and cash flows are faltering.

On the other hand, the historical dividend records of most of these research candidates have been quite good and have grown consistently despite earnings cyclicality. Therefore, investors focused on earning a steadily increasing stream of dividend income can be more apt to ride through the cycles in order to achieve strong long-term returns. More simply stated, although short to intermediate-term stock prices and operating results can be quite volatile, dividend growth is both more reliable and attractive. Consequently, most of these research candidates have generated more total cumulative dividend income than the market, and if held long enough, most have also produced higher growth and total returns as well.

Additionally, although cyclicality can be unnerving at times, it can also represent the precursor to significantly higher intermediate returns than those available from more “steady Eddie” type companies. One of the reasons for these “greater intermediate returns” phenomenon is the excitement created by extremely high year-to-year growth rates when companies are coming off a low point in their operating cycle. High growth off a low base generates extremely high quarterly and annual earnings reports that can get investors temporarily quite enthusiastic about the companies.  I will be clearly illustrating this in the analyze out loud video later in this article.

A Sector By Sector Review

This is part 14 of a series where I have conducted a simple screening looking for value over the overall market based on industry classifications and subindustry classifications reported by FactSet Research Systems, Inc.

In part 1 found here, I covered the Consumer Services Sector. In part 2 found here, I covered the Communication Sector. In part 3 found here, I covered the Consumer Durables Sector and its many diverse subsectors. In part 4 found here, I covered Consumer Nondurables. In part 5 found here, I covered companies in the Consumer Services Sector. In part 6 found here, I covered the Distribution Services Sector.  In part 7 found here, I covered the Electronic Technology Sector. In part 8 found here, I covered the Energy Minerals Sector. In part 9 found here, I covered the Finance Sector. In part 10 found here, I covered the Health Services Sector. In part 11 found here, I covered the Health Technology Sector. In part 12 found here, I covered the Industrial Services Sector. In part 13 found here, I covered the Non-Energy Minerals Sector.

In this part 14, I will be covering the Process Industries Sector.

In each article in this series, I will be providing a listing of screened research candidates from each of the following industry sectors, the sector I’m covering in this article is marked in green:

Sector 14:  Process Industries:

Chemicals:  Major Diversified

Chemicals:  Specialty

Chemicals:  Agricultural

Textiles

Agricultural

Commodities/Milling

Pulp & Paper

Containers/Packaging

Industrial Specialties

A Simple Valuation and Quality Screening Process

With this series of articles, I will be presenting a screening of companies that have become attractively valued primarily as a result of the bearish market activities experienced in 2018 from each of the above sectors. I will be applying a rather simple valuation and quality-oriented screen across each of the sectors. First, I have screened for investment-grade S&P credit ratings of BBB- or above. Next, I have screened for low valuations based on P/E ratios between 2 and 17. Finally, I have screened for long-term debt to capital no greater than 70%.

1 2 3 4
View single page >> |

Disclosure: Long ADM, IP.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.