A steady hand is in order as the seas look a bit more turbulent in early 2022. Whereas we were inclined to play offense through 2021, we adopted a more balanced posture on prospects for the chemicals sector upon entering 2022. As it turned out, 2021 was a great year for the market (S&P500 +26.9%) and a very good one for chemical stocks too, with the average stock in our coverage up 28.5% and the median performer up 20.6%. In 2022 though, investors must navigate between Scylla and Charybdis, so to speak. On the one hand, in order to achieve rather lofty expectations for base-case economic growth, we must move through the recent COVID/Omicron case surge while battling ongoing cost inflation. Then, if and when robust growth does come to fruition, investors will likely need to reckon with the potential hazard of several Fed rate hikes, perhaps extending into 2023+. Stock picking against this highly uncertain backdrop presents a challenge. In our view, the sweet spot for risk-reward will be those chemical stocks that offer a combination of positive if not premium earnings growth, yet inexpensive trading multiples relative to recent history and/or peers, and, preferably, some company-specific catalysts to tip the scales in our favor as investors. In this context, we favor diversified chemical producers, such as our top pick Huntsman (HUN), and lower-multiple specialty chemical stocks.

Top Picks:

  • Celanese Corporation (CE)
  • Huntsman Corporation (HUN)

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