The stocks of companies that produce the pigment titanium dioxide, or TiO2, should get a boost from an uptick in sales of architectural coatings, such as paint and stain, and an anticipated rebound in U.S. housing, according to Fidelity Portfolio Manager Emma Baumgartner.
“Since TiO2 is a key component of many architectural coatings, sales of both have historically tended to track one another pretty closely over longer periods of time,” says Baumgartner, who manages Fidelity® Select Chemicals Portfolio (FSCHX).
In helming the narrowly focused equity strategy since July 2023, Baumgartner follows a contrarian investment approach, focusing on the stocks of companies in which she anticipates a positive change in business fundamentals before it is recognized and properly valued in the stock price.
Recently, she’s noted a breakdown in the tight correlation between architectural coatings and TiO2. Demand for architectural coatings has remained healthy, even in the face of subdued existing home sales, largely because of the robust market for new residential construction. However, demand for TiO2 has been subdued.
It is here that Baumgartner sees investment opportunity. At some point, she expects these two markets to converge, and that it likely will occur via a recovery in TiO2 sales. Further, given that architectural coatings is the end market and TiO2 is an intermediate market, it’s logical that the former would drive demand for the latter, she explains.
Baumgartner believes that a rebound in existing home sales would be an additional tailwind for both TiO2 and architectural coatings, assuming the U.S. avoids a recession, she says.
“With the U.S. economy growing at a decent pace, the Federal Reserve expected to lower interest rates, and pent-up demand from people who have delayed moving because of high mortgage rates, I think the housing market could see more activity in 2024,” she contends.
Accordingly, Baumgartner has positioned the fund with a notable investment in Chemours (CC), which she considers a key low-cost producer of TiO2 and a company that has emerged as a disciplined market leader trying to tame the extreme price volatility that used to plague this market. Chemours is a top position in the fund as of June 30.
“The stock recovered from early-year turmoil related to accounting concerns after an internal review determined that there were no ’material misstatements,’” says Baumgartner. “I feel optimistic about the company’s prospects going forward.”
Tronox Holdings (TROX) is another outsized holding that Baumgartner believes could benefit from a rebound in TiO2. “Tronox is the most vertically integrated supplier of TiO2 and – like Chemours – near the low end of the cost curve,” she says.
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Emma Baumgartner is a research analyst and portfolio manager in the Equity division at Fidelity Investments.
In this role, Ms. Baumgartner manages Fidelity Select Chemicals Portfolio. Additionally, she covers chemicals, coatings, and industrial gas companies.
Prior to assuming her current position, Ms. Baumgartner held various roles within Fidelity’s Equity division, including research analyst for housing-related stocks, both within the consumer discretionary and REIT sectors, mega cap research analyst, mega cap research associate, and business associate. She has been in the financial industry since joining Fidelity in 2008.
Ms. Baumgartner earned her bachelor of arts degree, magna cum laude, in economics from Dartmouth College. She is also a CFA® charterholder.