How to Make Money in Chemicals Right Now
A chemical lab

The chemicals sector was a big winner overall in the last year. According to Google Finance, shares of Chemours Company (CC) gained a whopping 525% in the past 12 months, while those of Kronos Worldwide (KRO)  gained 185% and Huntsman Corp.  (HUN)  stock is up 134%.

 

Some chemical companies haven't had such white-hot performance. For example, PPG Industries  (PPG) shares have gained only 4.8% over the past year and are down 12% in the past six months, according to Google Finance, while Axalta (AXTA)  stock has risen 19% -- a sweet gain but nothing like the aforementioned names. Axalta is now trading at levels close to those when Warren Buffett bought shares in 2015.

Analysts at Citigroup recently downgraded shares of PPG Industries and Axalta, saying they don't expect either company to outperform this year. The analysts say the two companies will face slower growth in some markets and higher raw materials costs, according to a summary of their report by Seeking Alpha.

Citigroup might be underestimating PPG's turnaround potential.

PPG Industries has a market capitalization of $25.56 billion and is a supplier of protective and decorative coatings. Although the company's slowing revenues are due in part to rising raw-material costs, CFO Frank Sklarsky assured analysts that the company hasn't run out of cost-cutting opportunities.

Analysts expect the company to report 7.5% growth in adjusted earnings per share (EPS) in 2017 on the back of flattish sales. 

There is good reason to believe PPG Industries shares have more upside left. The company's management intends to identify which end markets are weakest and focus on restructuring operations to further reduce costs.

The stock also offers a modest 1.6% dividend yield, backed by 44 years of dividend growth.

Axalta, a $6.5 billion marine coatings company, saw annual sales decline in 2015 and in the past 12 months, according to Morningstar. On average, analysts expect 2017 to be better for Axalta, with sales rising 1.5%. While this is not a substantial increase, it could be the start of a sales growth trend that will improve once currency exchange rates move in a positive direction for the company.

Axalta was a darling not too long ago when billionaire Warren Buffett bought a stake in the company at $28 per share in 2015. The shares currently trade at $28.18.

This could be a great entry point for long-term investors. Buffett hasn't sold Axalta, indicating that he thinks the company's long-term growth prospects are still intact.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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