In the chemical industry, we like LyondellBasell (LBY), Huntsman Corporation (HUN) and Westlake Chemicals (WLK). Their profit margins have shown a greater increase due to cheaper natural gas prices than some of the bigger chemical companies, according to their earnings reports..
We feel that heavy equipment manufacturers like Caterpillar (CAT) and Deere & Company (DE) will be good investments over the next few years. I believe that Caterpillar has a good chance of growing share price. They have a dominate position in the United States, which is growing, and we are seeing growth in China.
Also their price-earnings to growth (PEG) ratio is lower than other manufacturers in the heavy equipment sector. We still like industrial commodity companies. As the world economy begins to expand again, I believe material producers like Cliffs Natural Resources (CLF), Freeport McMoran Copper & Gold (FCX) and the larger coal companies will once again move up in the investment placement arena. However, we are on hold here until we see better signs of improvement in emerging market countries.
Just to restate, I believe that the lack of an agreement on spending cuts, sequestration, tax increases, and the myriad of new regulations will be a damper on 2013 economic activity and therefore investment returns. That is why we are seeking to emphasize investments in companies with good cash flow, good cash distributions and companies that operate in areas where they have an advantage due to much lower energy costs and raw material input costs.We prefer companies that generate good after tax returns. With interest rates at historic lows, even as dividend taxes go up, the after tax returns are higher than most investment grade debt. There is a growing shift from very low yield bonds into equity. With a negative real return on Treasury bonds in the last half of 2012, we are seeing a shift to higher yielding equities. The longer central banks keep interest rates low, the larger will be the flow of funds. This should help increase good companies share prices as we go forward. BSG&L is a long term investor. We believe if you are patient, build cash and buy good companies on pull backs, your portfolio will have good growth over the long term. The investments discussed are held in client accounts as of March 1, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
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