There's nothing value investors love more than finding a good business operating in an out-of-favor cyclical industry. Unlike non-cyclical stocks like energy or consumer goods, cyclical industries have drastically different earnings figures depending on where the overall business cycle is at a given time.
The chemical industry is the very definition of a cyclical sector as it's involved in 96% of all manufactured goods. Globally, this is a $5 trillion industry that finds itself tied to rubber, plastic, textiles, refining, paper, metals, and many other products. Europe is the largest producer of chemicals in the world with the US, and Japan following close behind.
For 2013, chemical companies have lagged behind the overall rise in the stock market. Industrial demand tapered off as activity in China slowed and Europe continued to be plagued by economic weakness. These events have weighed down chemical stocks leaving analysts no choice but to downgrade expectations.
Value investors liken this news to the old adage, "it's always darkest before the dawn." And the sun may be rising in the form of a US-driven energy boom.
Energy companies require large capital outlays, which mean increased production for materials and manufactured goods that rely on support from chemical companies to produce. The US chemical industry is a $770 billion behemoth and is responsible for about 25% of the GDP. It's often looked at as a precursor to movement in the overall economy.
Sifting through all the potential chemical companies out there, Koppers Holdings (NYSE:KOP) seems to offer the best mix of growth and value. The $965 million company operates in two segments:
- Carbon Materials and Chemicals, which aids in the production of aluminum, steel, plastics, wood, and rubber in addition to distilling coal tar, a by-product of coal into coke processes.
- Railroad and Utility Products and Services, which
