This Chemical Reaction Hasn't Burned Investors

It might be true that America got ahead of itself in terms of oil and natural gas production, but that hasn't done anything except help a handful of chemical companies with operations stateside. Natural gas liquids, such as ethane, have been so cheap lately that Dow Chemical (NYSE: DOW  ) has noted over $100 billion in planned investment by chemical companies to take advantage of the currently cheap feedstocks. While it's doubtful all of them will make it to the finish line, any increase in demand for ethane should help producers that have turned to rejecting ethane because the market price is so low.

As demand slowly begins to increase, it is very likely that the price will tick up with it, which should be a good thing for all involved. Local producers have more than enough supply to accommodate these capital projects, so it's doubtful that the chemical companies will lose the entire margin advantage any time soon. Several companies are stepping up on both sides of the equation, and our analysts detail a couple of them in the following video. 

Record oil and natural gas production is revolutionizing the United States' energy position. This boom is benefiting far more companies than just those in the chemical industry. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the industry. We invite you to find out which three companies are spreading their wings by checking out the special free report, "3 Stocks for the American Energy Bonanza". Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


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  • Report this Comment On August 02, 2013, at 10:44 PM, banmate7 wrote:

    I went into DOW in 2011. Here is basically how things have unfolded. Note that the 1st purchase is my basis, the rest are reinvested dividends:

    date shares total_price price_per_share

    08/23/2011 196.0 $5,024.59 $25.64

    10/28/2011 1.705 $49.00 $28.74

    01/30/2012 1.498 $49.43 $33.00

    04/30/2012 1.458 $49.80 $34.16

    07/30/2012 2.198 $64.21 $29.21

    10/31/2012 2.224 $64.91 $29.19

    12/31/2012 2.051 $65.63 $32.00

    04/30/2013 1.966 $66.28 $33.71

    07/30/2013 1.915 $66.91 $34.94

    Today my $5,024.59 is worth $7,597.05. Basically I am up 51% in 2 years, not a bad return. Why did I buy in 2011? Because I'm a value investor.

    It was at a PE=12. Great company & brand. Nice dividend. There also seemed to be some secular trends I liked.

    North American energy development compelled me into DOW. I'm betting on a resurgent North American manufacturing sector, which DOW will ride. I also am betting on DOW being in global food supply chains, as populations increase & water challenges arise.

    DOW now has a PE=16. This is fair value, although from a glance I think the 10 year trailing PE ranges 18 - 20.

    I remain a hold. I might jump in with a dip, although I am fairly strict now a days about value in PE & PB. I also admit that DOW debt concerns me.

    My analysis is admittedly simple. I study cash flow & balance sheets. If I see some value, I buy, assuming the company passes my last but not least eyeball check. Warren Buffett often touts investing in great companies in a similar fashion, so I think I did that here. And like him, I will hold forever, reinvesting dividends, waiting to buy in again when it is cheap.

    I know this is but $5k. But I've had even better value investing results on, for example, $10k invested in Coca-Cola in 2006, which is now worth $25k. I expect to similarly beat the S&P500 with DOW. So far so good. Again, I plan on buying more now. Fingers crossed.

    Best of luck.

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