The First Friday Findings (of ’18) – January 5th, 2018

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SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

January 5, 2018

The First Friday Findings (of ’18) – January 5th, 2018

Thought for the week: “Regardless of the very varied predictions for the stock market for 2018 – we would stay focused on the economy”

Chart Of the Week – Annual Performance Unlikely To Be The Same in 2018

  • Chart Of The Week – Annual Performance Unlikely To Be The Same in 2018
  • Themes & Ideas for 2018
  • LNG – Subject Du-Jour
  • Weekly Winners & Losers

  • Chart of the Week – Annual Performance Unlikely To Be The Same in 2018

In the chart of the week we show sector performance for 2017. As in prior years, this chart has no predictive information as it lacks both a momentum component and a valuation overlay – things we discussed in last week’s Friday Findings and themes that we discuss in the complete report available to our clients today. Points of interest however include just how destructive GE was for the conglomerates group in 2017, with the rest of the pack outperforming a very strong overall market and GE the worst performer in our large cap coverage by a wide margin.

There is also some interesting momentum that is not obvious in the chart as we would see a much better story for metals and an even better story for chemicals if we just showed the last 6 months of the year. In general, signs of better economic growth as the year progressed benefitted the more commodity levered names versus the rest of the pack. The environment looks similar as we enter 2018.

In the section below we give a brief summary of our themes for 2018.

  • Themes and Ideas for 2018

Below is a brief summary of the themes that we are exploring at the beginning of 2018 – many of these follow-on from our view for 2017, which created outperformance in a very strong broader market. We will expand on each as we move through the first quarter and get data through the reporting season. Note how DWDP appears repeatedly – as does PX/LIN.

  1. Themes to keep playing
    1. Stronger growth and high operating leverage. All economic indicators suggest that, barring some sort of geopolitical shock, global economic growth in 2018 should eclipse that of 2017. We would stick with companies that are not at, or close to, peak valuation and have very strong operating leverage.
      1. DWDP, PX/LIN, SWK, HUN, EMN.
    2. Commodity Shortages – connected to the stronger growth story; we should run short of some commodities in an improving global growth environment.
      1. Metals and ethylene have been on our radar for much of 2017 – AA, FCX, LYB, WLK, DWDP.
      2. Possibly polyurethane, polycarbonates and styrene in 2018 – HUN, 1COV, TSE, DWDP, BASF.
    3. M&A – driving synergies.
      1. PX/LIN, DWDP.
  2. Played Out
    1. Safe, expensive, low volatility – as money moves towards more levered ideas.
      1. MMM, HON, EMR.
  3. New Themes
    1. Ag – Fertilizer consolidation and better market balance.
      1. MOS, POT, CF (CF is already pricing in a lot – Chart).
    2. US Infrastructure.
      1. SWK, DWDP, WLK, OLN, TRN.
    3. GE?
      1. This could still have another leg down and the company needs large structural change rather than increments. We understand the early year rally, but Q4 earnings could be another bump in the road in a few days.

  • LNG – Subject Du-Jour

This week we distributed a prospectus on a special study we are undertaking on the likely evolution of the LNG market and its implications for the chemical industry – linked here. We believe that the evolution of the LNG market over the next 5 to 10 years could have a profound effect on decisions with respect to power generation investment/shutdowns as well as the relative price of petrochemical feedstocks around the world.

The expected contents of the study – together with pre-publication pricing – are included in the attached prospectus.

Please let us know if you have interest in the study, would like to see additions to/changes to the content, or would like us to do something bespoke for you on this topic. The initial interest level appears to be high.

  • Weekly Winners & Losers

©2018, SSR LLC, 225 High Ridge Road, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Sources: Capital IQ, Bloomberg, Government Publications.

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