Mr. Redfield: Ten years ago, growth was considerably higher. There were a number of companies with over 10% growth, and there were a larger number of them too, and they were more stable than their cyclical, large chemical brethren. I don't think that's true anymore. Growth has come down, cyclicality has gone up, and quality, in terms of stability, has gone down. Relative market capitalization has shrunk from a small to a very small part of the S&P.
TWST: Allan, do investors still have good reasons to be attracted to
specialty chemicals today?
Mr. Cohen: We think so. It is a fairly heterogeneous group, which makes
it amenable for stock picking, as opposed to group picking. Stepping
back, I think many, but not all, of the attributes that have interested
people in the group are still there. These companies do provide their
customers with value-added problem solving. They were generally, and I
would argue still, higher quality, less cyclical than most, although the
volatility in the stock prices has probably increased. Finally, they are
characterized by strong cash flow and often by creative management teams
finding innovative ways to win. However, their customer base is
primarily industrial, and the industrial sector has become a smaller
part of GDP over the last 15 to 20 years in most developed countries.
Additionally, they've faced challenges from their customer base, which
has instituted supply chain management, global sourcing, and the like.
However, there are still several companies that provide good investment
opportunities with fairly high returns and quite moderate risk.
Specialty chemicals and materials has been a good area to selectively
invest in, but not for buying the whole group.
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