A Not-So-Obvious Mining Play in EMN

We are going to continue with our theme this week of companies that are the recipients of increased business due to the explosion in demand and price of raw materials. We have discussed the importance of this to companies that support these functions. For instance, mining needs steam shovels, which in turn help the businesses of Bucyrus (BUCY - commentary - Cramer's Take) and Joy Global (JOYG - commentary - Cramer's Take). We have discussed the ancillary impact this has in creating wealth, which in turn drives other business like homebuilding and soft-drink consumption. It's all good.

There is one more category of companies that are benefitting from the commodity rally. It is a bit of a third-tier play that goes beyond the basic material and the equipment used to mine it. It is the chemicals used to treat, clean and prepare it. This suggests the chemical sector should be benefitting from the recent commodity surge.

One play that we came across is Eastman Chemical (EMN - commentary - Cramer's Take). This company was originally formed as a spinoff from Eastman Kodak (EK - commentary - Cramer's Take). They make chemicals for a variety of applications in industrial uses.

Two applications we found of interest were the use of their products in the coal-mining process. We all know what coal prices are doing, and use as an additive in the production of biodiesel. Their products are also used in herbicides and pesticides giving them exposure to agricultural applications. Without getting into too much detail, we can see how Eastman's business could benefit from the boom in raw materials.

As is always the case, our main concern is the price action which is the validation of this fundamental data. No need to do too much research. We get the big picture and can simply follow the money.

In that regard, we are seeing money flow toward the chemical space and EMN in particular. Eastman made an attempt to break out last summer before the highs in the market were made. The stock had been heading south with the overall market since then. Just as the market made a low in January, so did Remnant since then, the stock has been pushing higher with considerable momentum.

Eastman Chemical

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During this advance, the stock has shown tremendous relative outperformance against the S&P 500, another indication of liquidity flowing to these stocks. Since this large push, the stock has been consolidating its gains. This has occurred on lighter volume, an indication of a lack of buying rather than any significant selling. We would use this consolidation as an opportunity to get long EMN for a move to the low $70s and trail a stop in the $64 level, the lower end of the consolidation.

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At the time of publication, John Hughes and Scott Maragioglio were long Eastman Chemical. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.