Three Stocks With Good Chemistry

With U.S. economic growth looking suspect and feedstock prices soaring, it's not so obvious for investors to throw in their lot with chemicals firms. After all, most of them buy petroleum-based raw materials to produce their compounds, which are in turn used as inputs for various consumer goods. They would seem to be bumped on costs on the one end and squeezed on the other by waning demand.

But I've presented a trio of chemical firms over the past two quarters in various tables of my InsiderInsights newsletter that have solidly bullish insider buying profiles. What's more, these stocks have also managed to trade relatively well in this ugly market.

The companies of note are PolyOne(POL Quote), Solutia(SOA Quote) and NewMarket(NEU Quote). Each has a different niche in the chemicals biz, but they all produce compounds that are used in a multitude of everyday products, some of which you probably used today.

My earliest tip that this out-of-favor sector may have bottomed came late last year. In November, five executives at PolyOne purchased nearly $527,000 worth of POL at an average cost of $6.46 a share. Of particular note, VP Michael Kahler doubled his holdings with his buys back then. And after smartly selling shares back in May of 2006 for over $9 a piece, VP Robert Rosenau has chosen to increase his stake by 40% at current prices. So far, their seemingly contrarian bets have garnered them a 19% return.

More recently, NewMarket's longtime chairman, Bruce Gottwald, purchased $17.1 million worth of NEU between May 21 and 23, at an average price of $67.70. This large purchase increased his direct holdings by an impressive 22%. Solutia's executives seem no less bullish. As the firm finally emerged from four years of Chapter 11 reorganization in March, seven insiders bought 52,500 shares of SOA at an average price of $12.26.

Passing It Along

Insiders' optimism at these chemical firms can be summed up in two words: pricing power. (Or, more specifically, expectations of it.) The recent news of price increases from industry giant Dow Chemical(DOW Quote) got quite a bit of airtime in the business media, but these smaller players already made the move. And insiders obviously expect their price increases to stick.