Just as yesterday's glamour stocks have become today's lacklusters, so can today's favorite can easily be tomorrow's wallflower. A growth rating can return to one industry as easily as it departs from another. This historical piece offers some great insight.
Take the oil industry, for instance. Once the prime growth favorite of Wall Street, it has lost much of its attraction. Formerly, oil securities were so highly regarded that the market evaluated them primarily on the basis of reserves or acres, rather than earnings. Now they are called "cyclical" and "unsuitable for widows and orphans." During recent years many investment companies and trust funds have even made large-scale liquidations of oil shares from their portfolios.
The chemical industry is another example of how the market can sharply revise its evaluation of equities. It was not too many years ago that the chemical industry was heralded as the nation's number one growth area.
Diversification-minded companies regarded chemicals as their prime outlets, just as they regard electronics today. In the 30 years between 1929 and 1959, chemical and allied products increased about 450 percent against only 170 percent for total U.S. industrial production. In the last decade alone the chemical industry advanced 140 percent in production against 60 percent for all manufacturing.
But the very success of the chemical industry invited new entries into the field just as today the electronics boom has made everybody electronics- conscious. Thus, companies from outside the industry have become producers of chemicals. The oil industry in particular has made significant inroads into total chemical production in the form of petrochemicals.
Whatever might be the effect of oilmen's inroads on chemical growth, the chief limitation to the growth of the chemical industry is its own size. The industry has so permeated every area of the economy that it tends to lose immunity to the general business cycle. When the demand for basic chemicals becomes closely correlated with the general business, it has become as cyclic as the over-all business activity. Surely, you can't be substantially different from something of which you are an integral part.
Hence, some of the leading chemical equities are now viewed primarily as high-quality, minimum-risk holdings for conservative accounts seeking a combination of cyclical gains and moderate longer-term growth.
Remember the comparatively poor performance of chemical stocks in 1960? In about a year's time ending September 1961 chemical stocks fell 25 percent in market valuation against only about a 10 percent decline for the industrial average.
What's in store for chemical stocks? Some experts see new profit opportunities just around the corner. They predict a fundamentally long- term growth factor in the industry. Perhaps as much as 8 percent annually or two-and-a-half times the growth rate of the economy as a whole.
Of course, this growth will not be enjoyed by all the thousands of chemical products. Some will boom. Some will grow slowly. And, inevitably, some will decline.
Although it is impossible to foresee which chemical products will forge ahead and which will drop behind, it is more than likely that the best opportunities for growth will be found among the smaller, more specialized companies.
While this article may be dated, the advice it offers is timeless. Energy and chemicals will also evolve, and the smart investor will continue to look to these industries for opportunities.