Weighing NewMarket's Profile Risks

Finally, NewMarket has a strong balance sheet with a manageable debt load and consistently positive free cash flow. The strong financial condition and high ROE might make NewMarket an attractive takeover target for private equity or another specialty chemicals company.

NewMarket's financial strengths may have been what attracted Renaissance Technologies, a renowned quant hedge fund to the stock. Looking at the firm's latest 13-F holdings, Renaissance owns 3.5% of NewMarket's outstanding shares. It also has a 4.2% stake in its competitor Lubrizol.

Please note that as of Sept. 6, BASF is delisted from the NYSE, and its American depositary receipts, or ADRs, now trade on the pink sheets market under a new ticker. The pink-sheets market typically carries riskier securities, but since value of these shares is related to their counterpart shares on the heavily traded Xetra market in Germany, I expect arbitrage to mitigate the trading risks associated with the pink sheets.

Risks Ahead

According to the 10-Qs, most of NewMarket's improved financial performance of late 2006 and early 2007 is attributable to the introduction of new products with higher operating margins and price increases on existing products. Whether this is a trend that can be sustained for very long is uncertain.

Another threat is that since this is a small company -- NewMarket's market cap is about $768 million -- its customers have significant influence over sales volume. In 2006, more than 10% of revenue came from two customers: BP(BP Quote) and Royal Dutch Shell(RDS Quote).

NewMarket is also a small player compared to its competitors. Its products directly compete with some of the larger oil conglomerates and chemical companies such as BASF.

The Bottom Line

NewMarket appears to be a great holding for speculation. The possibilities of a takeover and benefits from global growth make it appealing. However, consider the risk and volatility of the stock. With few guarantees on future performance or safety, a few bad cards can send this company in either direction.

As a safer alternative for investing in the additives and lubrication industry, I suggest BASF. Aside from a more diversified business, BASF is also more likely to benefit from the appreciating euro.