12 Exceptional Investments in the Process Industries Sector: Part 14


One of the main goals of this series of articles is to illustrate the significant differences between individual stocks, and the significant differences between different sectors. Therefore, from this perspective, I have been attempting to illustrate the “nature of the beast” for each of the sectors I have covered. The Process Industries Sector as reported by FactSet does consist of companies that are cyclical in nature. However, just as we’ve seen with other sectors, some are more cyclical than others.

Moreover, cyclicality is an attribute that can be problematic for many investors, but not necessarily a long-term negative. To clarify that statement, every research candidate except for one (International Paper) covered in this article has dramatically outperformed the S&P 500 on both dividend income and total return over the long run. However, that exceptional performance has not always been a smooth ride relative to the cyclical nature of these companies’ operating histories. Consequently, I feel comfortable stating that being a long-term investor in cyclical companies such as those covered here can be very challenging. Therefore, many investors might lack the fortitude to be able to stay the course during those times when earnings and cash flows are faltering.

On the other hand, the historical dividend records of most of these research candidates have been quite good and have grown consistently despite earnings cyclicality. Therefore, investors focused on earning a steadily increasing stream of dividend income can be more apt to ride through the cycles in order to achieve the strong long-term returns. More simply stated, although short to intermediate-term stock prices and operating results can be quite volatile, dividend growth is both more reliable and attractive. Consequently, most of these research candidates have generated more total cumulative dividend income than the market, and if held long enough, most have also produced higher growth and total returns as well.

Additionally, although cyclicality can be unnerving at times, it can also represent the precursor to significantly higher intermediate returns than those available from more “steady Eddie” type companies. One of the reasons for these “greater intermediate returns” phenomenon is the excitement created by extremely high year-to-year growth rates when companies are coming off a low point in their operating cycle. High growth off a low base generates extremely high quarterly and annual earnings reports that can get investors temporarily quite enthusiastic about the companies. I will be clearly illustrating this in the analyze out loud video later in this article.

A Sector By Sector Review

This is part 14 of a series where I have conducted a simple screening looking for value over the overall market based on industry classifications and subindustry classifications reported by FactSet Research Systems, Inc.

In part 1 found here I covered the Consumer Services Sector. In part 2 found here I covered the Communication Sector. In part 3 found here I covered the Consumer Durables Sector and its many diverse subsectors. In part 4 found here I covered Consumer Nondurables. In part 5 found here I covered companies in the Consumer Services Sector. In part 6 found here I covered the Distribution Services Sector. In part 7 found here I covered the Electronic Technology Sector. In part 8 found here I covered the Energy Minerals Sector. In part 9 found here I covered the Finance Sector. In part 10 found here I covered the Health Services Sector. In part 11 found here I covered the Health Technology Sector. In part 12 found here I covered the Industrial Services Sector. In part 13 found here I covered the Non-Energy Minerals Sector.

In this part 14 I will be covering the Process Industries Sector.