Core Concepts: A Look at Chemical Stocks

So you want to be a better investor. There's a key prerequisite: You must have a desire to learn. By enhancing your investing skill set, you'll improve your odds of identifying bargain stocks more easily and be less likely to overlook multi-bagger opportunities.

Over the next few months, I'll be integrating core investing concepts into a methodical review of stocks in every major market sector. Today, I'll take a look at chemical companies, and tomorrow, I'll examine stocks in the computer and office supply sectors.

Although chemical stocks don't hold much allure for many investors, don't make the mistake of dismissing this group out of hand. Bargain-hunters are willing to go anywhere and everywhere in pursuit of heavily discounted assets. In fact, it's easier to spot bargains in sectors that are largely ignored by the investing crowd.

Avery Dennison: Too Stable

First, let's take a look at Avery Dennison (AVY - commentary - Cramer's Take). This specialty chemical company makes for an interesting case study for students of the stock market. It might be counterintuitive, but Avery Dennison illustrates the risk of buying companies that are too stable.

Companies with stable margins and average sales growth generally have both limited downside and limited upside. Study the operating history of Avery Dennison, and you'll see very little oscillation in its operating metrics. This consistency makes it easy for the market to price the stock. Below-average operating change translates into a stock with below-average price change, as this five-year chart shows.

Avery Dennison

Source: BigCharts.com

As a bargain-hunter, I'm interested in mispriced -- or "inefficiently priced" -- stocks, and that requires reasonably wide swings in operating performance. Therefore, Avery Dennison is not an appealing stock.

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At time of publication, Alsin and/or ACM was long Georgia Gulf, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor, and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.