GFRE Gulf Resources, Inc. (MM)

Industry Rank Analysis 4-20-11

The top of the Zacks Industry list continues to be dominated by the Machinery and Energy industries. However, I wrote about each of them in the last two weeks, so I will not waste my -- or more importantly, your -- time by repeating myself. Though if anything, they are even stronger now than when I wrote about them.

One fairly large industry, both by market capitalization and by number of firms, which is doing well and is not part of either Energy or Machinery, is the Diversified Chemical Industry. Its strong performance is a little bit counter intuitive, in that it is a huge user of Energy, specifically petroleum, and one would expect a margin squeeze from rapidly rising oil prices. It appears that demand is strong enough for Chemicals that the firms have enough clout to pass through the higher energy costs to their customers.

Chemicals go into a wide variety of products, and the strength in this group is a good indication of overall worldwide economic strength. I would note though that many of the integrated oil firms also have large Chemical operations, so strength in there and in Chemicals at the same time is not totally contradictory.

Zacks Industry Classifications

The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well, a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts. It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list. The definition of size that matters here is not the total sales or market capitalization but the number of companies in the "industry.”

Diversified Chemicals Give Positive Reaction

The Diversified Chemical industry is a large one. It has 33 firms in it, and many of these firms are huge, household names, even if their direct exposure to the customer is sometimes limited. A large number of firms makes it much less likely that the industry will end up on the top (or bottom, for that matter) of the charts. The industry is currently in 18th place, an improvement of 15 spots from last week, with an average score of 2.47 down from 2.52.

I would, however, note that some of the other “industries” related to chemicals, such as the Specialty Chemical firms are not doing nearly as well on the Zacks Rank and are solidly in the middle of the pack. Those firms tend to be more stable and less cyclical than the Diversified Chemical firms. The output of the Diversified Chemical firms tends to be measured in tons, the output of the specialty firms in pounds. The Diversified Chemical firms are often major suppliers to the Specialty Chemical firms.

The first table shows the Diversified Chemical stocks that hold the enviable Zacks #1 Rank (Strong Buy). The second table shows the Zacks #2 Ranked (Buy) firms. If the Zacks ranks were random, one would expect that only 5% of the firms in an industry would be “#1s” and 15% would be “#2s.” That is not the case with the Diversified Chemicals. Six of them (18.2%) have Zacks #1 Ranks, and eight (24.2%) have Zacks #1 Ranks.

There is a wide spectrum of market capitalizations to choose from on the lists ranging from mega-caps like BASF (BASFY) and DuPont (DD) down to the tiny Northern Tech (NTIC). This is a worldwide industry, and several of the firms are ADRs.

Valuations are for the most part reasonable, but not super cheap, with the exception of the micro-cap Gulf Resources (GFRE). However, the estimates on these firms are rising, and an estimate in motion tends to stay in motion, so the true P/E on these firms might be lower than they look based on current estimates.

Number 1 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Basf Ag-Adr New	BASFY	$85,152	11.17	10.44	4.00%	13.22%	$92.71
Ppg Inds Inc	PPG	$14,915	14.59	13.43	5.88%	3.59%	$92.65
Huntsman Corp	HUN	$4,739	14	11.02	1.35%	1.49%	$19.69
Kronos Worldwd	KRO	$3,359	13.26	10.07	0.00%	0.00%	$57.97
Olin Corp	OLN	$2,005	14.71	11.78	25.97%	31.94%	$25.16
Gulf Resources	GFRE	$170	2.69	2.48	0.83%	N/A	$4.88

Number 2 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Du Pont (Ei) De	DD	$50,849	14.81	13.17	0.82%	1.36%	$54.89
Praxair Inc	PX	$31,316	19.03	16.78	0.14%	0.11%	$103.15
Lyondellbasel-A	LYB	$23,294	13.12	11.72	3.05%	-0.54%	$41.01
Akzo Nobel Nv	AKZOY	$16,903	14.56	12.53	0.00%	0.00%	$72.39
Celanese Cp-A	CE	$7,067	11.34	9.89	0.63%	0.58%	$45.29
Methanex Corp	MEOH	$2,957	15.61	10.52	0.39%	1.68%	$31.90
Innophos Hldgs	IPHS	$1,002	12.02	11.28	0.00%	0.00%	$46.60
Northern Tech	NTIC	$69	18.17	14.4	0.57%	0.00%	$15.99

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php
 
BASF AG-ADR NEW (BASFY): Free Stock Analysis Report
 
DU PONT (EI) DE (DD): Free Stock Analysis Report
 
GULF RESOURCES (GFRE): Free Stock Analysis Report
 
NORTHERN TECH (NTIC): Free Stock Analysis Report
 
PPG INDS INC (PPG): Free Stock Analysis Report
 
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