3 chemical stocks protagonists of the sector breakout

I hope you are the type of investor who will sit down and do the homework necessary to come out of the financial markets a winner. When you do this, you’ll notice that the big ones in places like The Goldman Sachs Group NYSE:GS and other reputable investment firms generate their ideas through a process called “top-down” research. If so, we will do some of this for you.

One of the easiest ways to keep up with the pace of the economy and a reliable way to catch new and developing trends in specific sectors is to follow the monthly changes within the ISM PMI, Manufacturing and Services reports. For January you will notice the perfect turnaround in the chemical stocks sector, which is exactly what Goldman is looking for, but more on that later.

For now, all you have to worry about is why the stock likes it Valves NYSE: VVV, Stepano New York Stock Exchange: SCLand even Ashland NYSE: ASH they could be good additions to your portfolio in the next quarter. Remember that, according to the FedWatch tool of ECM Group NYSE:ECMthe deadline to consider these securities expires in May this year, when markets are betting that the Fed will cut interest rates.

Is now the time?

How can you decide to open your own brokerage business and look to potentially buy one of these names? Well, generally, uncertainty creates doubt and doubt creates fear. Here’s how you can understand what’s going on behind the scenes in the economy and hopefully reduce that uncertainty so you can trade with more confidence.

In the last three months of manufacturing data, covering the months of November, December and now January, the chemical industry contracted for two-thirds of that period. January showed the space expanded for the first time in the quarter. In a month where only four industries expanded, that’s a big deal.

As part of the report on the macroeconomic outlook for 2024, Goldman Sachs expressed expectations of a turnaround and turnaround in the manufacturing sector for the year. In support of this thesis there are potential rate cuts by the FED (which could arrive as early as May). Since markets are forward-looking, you may want to look into stocks to buy before the money move occurs.

What better way to pick a turnaround game than chemical space? After contracting in November and December, the industry has finally expanded due to broadening demand and sentiment, demonstrating that “sales are ahead of expectations,” as executives expressed it in the survey section of the PMI.

Breaking performances between the SPDR fund for selected industrial sectors NYSEARCA: XLI and the broader S&P 500 index, you’ll see a 4.7% semi-annual underperformance from industrial names. However, in the last quarter, they saw a return that outperformed the market by nearly 1.5%.

While there’s nothing exciting about it, it’s an early sign of the times when 1.5% could quickly turn into double digits once the rest of the market catches on to the industry’s new wave of expansion. Of course, you can catch the trend now or wait for further confirmation in the next round of PMI data.

Spoiled for choice

When analyzing the chemical industry, there are two things you need to focus on. First, remember how much average earnings per share are expected to grow over the next twelve months. Secondly, it is possible to evaluate how much the markets are willing to pay today for tomorrow’s earnings, which can be obtained through the forward price-to-earnings (P/E) ratio.

On average, this sector is set to grow its EPS by 17.6% over the next year, and those earnings trade at an average forward P/E multiple of 13.9x. These benchmarks can help you identify positive outliers that will grow the most once – or if – the sector manages to achieve another month of growth according to the PMI.

So, what specific actions should you consider?

Let’s start with Valvoline. VVV stock is expected to grow earnings by 23.1%, above the industry average. Its forward P/E of 18.5x calls for a justified premium value of 32.9%; think of the saying, “It has to be expensive for a reason,” and now you know why. Even the analysts of Morgan Stanley NYSE:MS see the writing on the wall, as they raised their price targets to $44.0 per share, an upside of 22.2% from today.

Stepan’s shares have also attracted institutional investors, as Russell Investment Group increased its stake to 30.7% in February. Analysts see its EPS rising as high as 63.7% this year, justifying its 29.8% premium valuation for the industry through its forward P/E of 18.0x.

Last but not least, Ashland stock has analysts pushing for increases of 43.3% in EPS for the next twelve months. Its 14.4% premium to the sector seems conservative to where this stock could trade. This may be why analysts Wells Fargo New York Stock Exchange: WFC This month they raised their price targets to $100.0 per share, implying a 10.2% upside from today’s prices.

An industry poised to potentially continue to expand after suffering from downward pressure, and the best stocks in the industry to tilt the odds in your favor, what’s not to like?

Before you consider CME Group, you’ll want to hear this.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and CME Group wasn’t on the list.

While CME Group currently has a “Hold” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here