Chemical Stocks Could Produce a Positive Reaction

There can be no question that this has been a difficult period in stock market history. Prices have been under downward pressure all year long, and many investors have large losses in their portfolios. The credit crisis and real estate crisis have pushed us to what some have called the edge of the abyss. The market is held hostage to a large degree by politicians and bureaucrats as they flounder around for a solution to the economic and market morass.

At times like these, I try to keep in mind that crisis does indeed equal opportunity. One of the ways I help myself stay on track is to recall the investment philosophies and thoughts of some of the true investing masters and legends who came before me. I go back and reread such things as John Train's Forbes magazine article from 1978 entitled "How Mr. Womack Made a Killing." It is reproduced in Classics, An Investment Anthology, a compilation of articles and discussions on the markets over the years. Every investor should read it once a year. The book, compiled by Charles Ellis and James Veritin, can be hard to find but is usually available at online bookstores.

The book also contains the investing maxims of the recently deceased grand master of value investing, John Templeton. Two of his guidelines for successful long-term investing would seem to apply to the current market. Templeton counseled that the best time to buy is at the point of maximum pessimism, and the best way to get a bargain in the stock market is to buy what others are selling.

With that thought in mind, I looked around this morning for industry groups that have just been dumped out by investors and appeared to be at the point of maximum pessimism. The chemicals group certainly seems to meet these criteria. The weakness from other sectors, particularly housing and automotive, has spilled over to the group, and these stocks have performed poorly year to date. Climbing raw-material and energy costs have compressed margins, and the stocks have been under enormous selling pressure this year.

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At the time of publication, Melvin had no positions in stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.