The materials sector has been showing leadership in the beginning of this young year. MoneyShow.com contributor Kate Stalter has found that some of the best sector performers hail from the chemical industry.
So far in January, the top performing sector in the S&P SmallCap 600 is materials, a sign of rotation from late 2011, when utilities claimed the top spot. I tend to check leading sectors to see which are good price gainers, and drill down from there for the best names within the sector.
One of the best names from the sector is Balchem (BCPC), a New York company that makes specialty additives for food producers and the medical industry.
The stock has been consolidating price gains since retreating from an all-time high in August. Its price action occurred simultaneously with the market downturn and volatility of last summer, and its price patterns essentially mirror those of the SPDR S&P 600 ETF (SLY).
Balchem still has some work to do before regaining its prior high. It’s been trending along key moving averages, and the character of the trade has tightened up since the summer’s extreme volatility.
The current consolidation has been prolonged, not a quick V-shaped pullback that quickly rebounded. It could be constructive that the stock has taken its time shaping its correction, as that is giving holders lacking in conviction plenty of time to consider their exit.
I also like this stock from a fundamental point of view. Analysts expect double-digit profit growth in the next two years, and the company has a solid return on equity of 20%.
Another index component, Stepan (SCL), tends to sport volatile chart action, but I’m encouraged by recent moving average support. The Illinois company, which was founded in the 1930s and has been publicly traded since the 1960s, rallied to an all-time high on 2012’s first day of trading.
It’s since pulled back, slicing its 50-day line on January 9, but regaining some of its losses. It’s now nestled above short-term averages.
The company, which makes chemicals for a range of industrial applications, has a market cap of $835 million and it trades only 32,000 shares a day. That lack of liquidity is a big factor in its volatility. The stock has a beta of 1.13, showing greater propensity to price swings than the broader market.
The company is due to report earnings on or around February 7, with Wall Street expecting income of $1.28 per share on revenue of $451 million.