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Big tech continues to fluctuate while America’s more traditional mid-cap companies in dull sectors like manufacturing are coming to the fore as good buys, suggests Tim Melvin, editor of The 20% Letter.

One such boring sector in manufacturing is chemicals. Celanese Corporation (CE), based in Irving, Texas, is the world’s largest producer of acetic acid and its chemical derivatives, including vinyl acetate monomer and emulsions. In simple terms, if you need anything to do with acetates, then Celanese can make it for you.

The price of natural gas is crucial when considering whether to invest in Celanese. Luckily for the company, while natural gas input prices initially rose sharply in 2022, the crash back to lower levels has been rather swift. And, here in the U.S., we have a secular long-term trend of lower natural gas prices.

The result is that Celanese has been sitting in the perfect spot because the producer price index for its core output has recently risen to a 30-year high. In essence, the company’s production costs have been cratering just at the point when its products are fetching premium prices, and investors have begun to take notice.

The company was able to push through substantial price increases, at an average of 15%, at the end of 2022. Its operating margins are running two percentage points above the five-year average of 24%, suggesting that the company’s pricing power is improving.

I believe the trend of Celanese’s profit margins increasing will continue for the foreseeable future. One reason is due to the strategy being implemented by the company’s management, including the Clear Lake expansion project. Another is the engineered materials segment (45% of 2022 EBITDA), which produces specialty polymers for a wide variety of end markets.

The stock has been very cheap, recently trading at an historically cheap forward price/earnings (PE) ratio of 8.4, according to FactSet consensus. And that number could rise to 10, as the impact of the DuPont divisional acquisition feeds through the earnings statement. That makes Celanese a well-priced and operationally geared play on both U.S. energy independence as well as economic strength.

Another nice plus to consider is that Warren Buffett’s investment vehicle, Berkshire Hathaway Inc. (BRK-B), added to its existing holding in Celanese during the last quarter. I suspect that was a bet on the strength of the U.S. economy. In total, Berkshire owns 9% of Celanese’s free float.

Add to that a decent dividend — the yield is 2.4% — and you have a solid buy here. The company has a pattern of raising its dividend every year for the last 14 years, and I expect 2023 to be no different. Celanese should have sufficient cash flows to pay down its debt and slowly grow its dividends.

About the Author

Tim Melvin is a 30-year plus veteran of financial markets. He is also the editor of The 20% Letter. Mr. Melvin uses rigorous quantitative analysis based on the principles used in deep value and private equity styles of investing to help investors compound their wealth by using strategies designed to maximize profits and minimize risk.

He uses in-depth research efforts to uncover special situation opportunities that can profit regardless of market direction. Mr. Melvin has also developed models for building alternative income portfolios that can help individual investors. He believes that individuals have powerful advantages over institutions but are not taught how to use them. Mr. Melvin wants to be the one who helps individual investors stop taking entirely too much risk for too little return.

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