The most unglamorous businesses often toss up the best values. Richard Earnest, portfolio co-manager of HighMark Value Momentum fund, thinks he's spotted a bargain in old-line Dow Chemical, the big ($46 billion sales) maker of plastics and chemicals.
Chemicals are a highly cyclical industry -- but that's what attracts Earnest. "For the first time in a long time, we have a unified, global economic recovery, which is great for big, cyclical multinationals," he explains. Overseas, where Dow (symbol DOW) generates 62% of its revenues, emerging economies such as China and India are booming. Growth in even the large, mature consumer markets of Japan and Western Europe is perking up.
The second plank of Earnest's case for Dow turns on the price of natural gas, the principal feedstock for the Michigan-based company's chemicals and plastics. Natural gas prices have risen, but not nearly as much as world oil prices. Dow's big European competitors such as BASF and Bayer depend on naphtha, an oil derivative, for their feedstock. Advantage Dow.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Buoyed by strong free-cash flow, the company is rapidly reducing debt and cleaning up its balance sheet. Earnest reckons it may start buying back its low-priced shares soon. Meanwhile, Dow's stock currently yields 3.7%, one of the better returns available apart from the utility and banking sectors.
At $41, the stock sells for just eight times the average of analysts' 2006 earnings estimates of $4.89 a share, according to Thomson First Call. Earnest thinks the company could earn in excess of $5 a share next year and sell on a P/E multiple of 10, implying a $50 price. Plastics and chemicals may not be pretty, but the total return on venerable Dow shares could be handsome.
--Andrew Tanzer
-
Americans, Even With Higher Incomes, Are Feeling the SqueezeA 50-year mortgage probably isn’t the answer, but there are other ways to alleviate the continuing sting of high prices
-
Hiding the Truth From Your Financial Adviser Can Cost YouHiding assets or debt from a financial adviser damages the relationship as well as your finances. If you're not being fully transparent, it's time to ask why.
-
How to Manage a Disagreement With Your Financial AdviserKnowing how to deal with a disagreement can improve both your finances and your relationship with your planner.
-
If You'd Put $1,000 Into Caterpillar Stock 20 Years Ago, Here's What You'd Have TodayCaterpillar stock has been a remarkably resilient market beater for a very long time.
-
I'm a 55-Year-Old Dad. Here’s How My 28-Year-Old Daughter Showed Me That AXP Is Still a Solid InvestmentAmerican Express stock is still a solid investment because management understands the value of its brand and is building a wide moat around it.
-
If You'd Put $1,000 Into AMD Stock 20 Years Ago, Here's What You'd Have TodayAdvanced Micro Devices stock is soaring thanks to AI, but as a buy-and-hold bet, it's been a market laggard.
-
If You'd Put $1,000 Into UPS Stock 20 Years Ago, Here's What You'd Have TodayUnited Parcel Service stock has been a massive long-term laggard.
-
How the Stock Market Performed in the First Year of Trump's Second TermSix months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
If You'd Put $1,000 Into Lowe's Stock 20 Years Ago, Here's What You'd Have TodayLowe's stock has delivered disappointing returns recently, but it's been a great holding for truly patient investors.
-
If You'd Put $1,000 Into 3M Stock 20 Years Ago, Here's What You'd Have TodayMMM stock has been a pit of despair for truly long-term shareholders.
-
If You'd Put $1,000 Into Coca-Cola Stock 20 Years Ago, Here's What You'd Have TodayEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market in the long term.
