Basic Materials are up 18% in the last month – should you pay attention to stocks like HUN?

The market seems to be looking for reasons to start functioning something relatively close to normal right now – at least, as much as normal is possible under current circumstances. Last week saw the major indices stage their biggest short-term rally in the last seven decades as investors used unprecedented Fed action to inject the economy with massive levels of liquidity aimed at businesses large and small, and indications that the U.S. may be starting to reach a peak in COVID-19 infections to start buying back in to the market in a big way.

Is the enthusiasm warranted? I like seeing the market rally as much as the next guy, so it’s hard not to hope that it is. I think it’s important, though to remember that the stock market tends to anticipate economic impacts – positive and negative – and so price in investor’s hopes and/or fears about them well in advance of any actual, verifiable data. That means that any reversal off extreme lows or extreme highs isn’t automatically a sign that the market is ready to start moving in the opposite direction. In fact, I think the risks in the economy remain very high right now – not only because we still don’t know when state and federal governments will begin to loosen needed restrictions on business and social activity. If you’re one of millions of workers who have been sent to work from home, or harder, been temporarily furloughed, or even worse, been laid off, the plain and simple truth is that we don’t know when business operations are going to return to normal.

The U.S. government has put some pretty impressive, emergency measures in place to try to blunt the impact of massive business shutdowns, including issuing temporary loans that in many cases will be completely forgiven if small and medium-sized businesses don’t lay anybody off, increasing unemployment benefits for those who have lost their jobs, and issuing stimulus checks to American workers at practically all taxable levels. That doesn’t mean, however that there isn’t going to be an impact, or that the benefits of those programs are going to be seen right away. Unemployment claims jumped in the just the last couple of weeks from a few hundred thousand to more than 6 million as of last week’s report. That means the backlog of claims that need to be cleared is massive. A similar story can be told right now about the processing of loan requests from small and medium-sized businesses. It will take time for those programs to start taking real effect, and to me that means that the market could be due for another, strong and sizable move lower in the near term.

With that kind of broad risk in mind, it is interesting to see certain industries starting to move higher. I’m a little leery right now about sectors like Energy, Technology, and Consumer Discretionary, because I think the risks in those industries may be even more exaggerated than others, like Healthcare of Consumer Staples. What about Basic Materials? This is a sector that has rebounded strongly with the rest of the market; in fact over the last month the sector is up a little over 18%. There are a number of stocks in this sector that I have followed for some time, and the broad market’s big drop since February into bear market territory wasn’t merciful to any of them. 

Huntsman Corp (HUN) is a good example. From the beginning of January, the stock dropped from a high point around $24 to a March low a little above $12 per share. That’s a -50% drop, and even though the stock has rebounded to about $16 since, it is still down -30% on the year. This is a company that has a solid fundamental profile – at least, as the last earnings report indicates, which admittedly came before any real impact from COVID-19 was being seen in the U.S. on a real level. Does that mean the stock is a good value-oriented opportunity, or a risk you should stay away from right now?

Fundamental and Value Profile

Huntsman Corporation is a manufacturer of differentiated organic chemical products and of inorganic chemical products. The Company operates all of its businesses through its subsidiary, Huntsman International LLC (Huntsman International). The Company operates through five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. Its Polyurethanes, Performance Products, Advanced Materials and Textile Effects segments produce differentiated organic chemical products and its Pigments and Additives segment produces inorganic chemical products. The Company’s products are used in a range of applications, including those in the adhesives, aerospace, automotive, construction products, personal care and hygiene, durable and non-durable consumer products, digital inks, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals and dye industries. HUN’s current market cap is $5.3 billion.

Earnings and Sales Growth: Over the last twelve months, earnings declined a little over -44%, while revenues dropped almost -26%. In the last quarter, earnings dropped almost -29% while revenues shrunk by -1.78%. The company’s margin profile is solid and improving. In the last year, Net Income was 8.06% of Revenues, and increased to 34.3% in the last quarter. I expect this measurement to be volatile over the next couple of quarters as actual impact of COVID-19 will start to be reflected on their next earnings report, which is due for the beginning of May.

Free Cash Flow: HUN’s free cash flow is healthy at $623 million. That translates to a Free Cash Flow Yield of 16.66%. It is noteworthy that Free Cash Flow has increased from $500 million in June of 2019, but is still below its peak at $1.2 billion in June 2018.

Debt to Equity: HUN has a debt/equity ratio of .91. This is a conservative number, but it increased from .57 in the third quarter of 2018. The improvement in the company’s Net Income is also reflected by an increase in liquidity, which is a positive development. Total cash in the last quarter was $525 million, while long-term debt is $2.56 billion.

Dividend: HUN pays an annual dividend of $.65 per share, which translates to an annual yield that of about 3.86%.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $19 per share. That means the stock is undervalued, with about 19% upside from its current price.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The diagonal red line on the chart above traces the stock’s downward trend from February of 2018 to its low point last month. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has increased from that recent low at around $12 per share, with a strongly bullish push to its current level around $16. The stock is approaching resistance at around $17 from previous pivots in June of last year. A push above $17 could give the stock momentum to test its next resistance about where the 38.2% retracement line sits, which is right around $20.50. Immediate support is back at around $15.50, using a pivot high that occurred in mid-March. A drop below that point should give the stock room to test its multiyear low at around $12.

Near-term Keys: The stock’s rebound from its trend low, with pretty solid bullish momentum, makes a short-term bearish set up look like a pretty low probability trade; in the short-term, the best likelihood of success is on the bullish side, with a break above $17 offering a good signal to buy the stock or to consider working with call options with an eye on the 38.2% retracement line around $20.50 acting as a useful bullish profit target. A break below $15.50 could offer an interesting signal to think about shorting the stock or working with put options, keeping $12 to $12.50 in mind as a bearish exit signal. While I like HUN’s fundamentals, and think it is a pretty good value at this price, I’m not sure I’m buying the legitimacy of the latest rally. If you’re looking for a useful long-term opportunity, I would wait to see if the stock drops back towards $15, or even near to its 52-week low before taking a value-based opportunity more seriously.


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