A Little-Known Rebound Bet: Under the Radar

RICHMOND, Va. ( TheStreet) --When investors think of companies that might benefit from an economic rebound, chemical maker NewMarket ( NEU) probably doesn't come to mind.

While demand for the company's petroleum and lubricant additives isn't directly tied to consumer spending, increased economic activity plays a major role in sales. As the economy recovers, Richmond, Va.-based NewMarket could see increased revenue that could expand the company's wide profit margins and make the stock a potentially profitable turnaround bet.

NewMarket shares are cheaper than those of peers, with a forward price-to-earnings ratio of 11 vs. an industry average of 35 and a S&P 500 average of 17. The company also trades at a discount based on estimated growth rates. A PEG ratio of just 0.65 places NewMarket well below the fair-priced level of 1. The company has delivered strong performance, with a return on equity above 36% and a gross margin of 34%, a 13% increase over the previous year.

NewMarket shares have more than tripled during the past year. The discounted valuation is even more impressive given the fast climb of the shares. The stock also offers a dividend yield of 1.4%, adding to already big returns.

As companies ramp up production, their machines will need more of NewMarket's lubricants. Increased shipping will increase petroleum demand, which would also add to sales. With about 60% of sales coming from overseas, NewMarket is positioned to capitalize on growth in emerging markets.

It's tempting to classify NewMarket as a green bet because some of its additives are used to increase engine efficiency, but this alone doesn't make the company a defender of the environment. If fact, costs related to site clean-up are a key issue for this company.

Under Superfund laws, the company can be held responsible for groundwater contamination, requiring them to pay to clean the areas in which they operate. This isn't a reason to shun this stock, but the situation should be monitored to avoid any potential bumps in the road caused by litigation.

While NewMarket has a strong competitor in Lubrizol ( LZ), both companies could prosper from a turnaround.

At discount prices, NewMarket shares are worth considering if you're looking to invest in a company that's not making headlines every day. We rate the company "buy."

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.

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