Consolidation Boosts Chemical Sector

• Braskem (NYSE:BAK)
  This Brazilian company is South America's largest petrochemical company. Braskem operates approximately 20 chemical plants that make a variety of products, including chemicals used to make plastics. The company is also two years away from opening a plant that will produce "green plastics". The company calls these plastics "green" because the entire process is powered by sugarcane. Dow Chemical also plans to open a similar plant in 2011 in Brazil. With energy prices so high, the movement from relying on fossil fuels to sugar makes perfect sense. From a Fundamental perspective, Braskem's stock is trading with a P/E ratio of 22, above the industry average of around 16, but, with growth more than four-times that of the industry, this P/E is warranted. (To learn about chemical companies awash eco-friendly language, read The Green Marketing Machine.)
  
  
• OM Group (NYSE:OMG) ,
  OM Group supplies a large number of industries with metal-based specialty chemicals. It offers over 1,200 products to about 2,000 customers, making it a diverse firm that can weather sector slowdowns. Fundamentally, OM Group is undervalued compared to its competitors with a P/E ratio of 5. From a technical perspective, the stock is typically not the type that I would discuss. Since early May the stock has fallen 50% and is now at the lowest level since 2006.
  
  
• DuPont (NYSE:DD)
  This giant is not likely a takeover candidate because the company is already the third largest chemical company in the U.S., but from a valuation point of view, DuPont could be attractive to value investors. After hitting a new 2008 high in April, the stock has fallen more than 20% to the lowest level in over a year. The P/E ratio of 12 is below the industry average of 16. Also consider the company not only has exposure to the specialty chemical sector, but also the booming agricultural chemical business. Finally, there is the 4.0% annual dividend yield to consider. (Find out more on value investing in Stock-Picking Strategies: Value Investing.)

Buying on Takeover Speculation
One strategy I will never give my blessing to is buying a stock purely as a takeover candidate. Unless you have information you should not have, the odds of you picking a stock that gets bought is very low. That said, if you believe in a stock fundamentally and technically and there is a slim chance of more takeovers in the sector, then you have the green light to buy. The takeover potential is merely a bonus.

To learn more, check out our Mergers and Acquisitions Tutorial.