3 Chemical Specialty Stocks to Watch Amid Demand Headwinds

The Zacks Chemicals Specialty industry is weighed down by demand weakness, largely due to sluggishness in Europe, a slow economic recovery in China, and disruptions from tariffs. Margins of companies in this space also remain under pressure due to the still-elevated input, supply-chain and logistics costs. 

Industry players, such as Sociedad Quimica y Minera de Chile S.A. SQM, Element Solutions Inc ESI and Flexible Solutions International Inc. FSI, are banking on strategic measures, including operating cost reductions, to tide over a persistently challenging environment.

About the Industry

The Zacks Chemicals Specialty industry consists of manufacturers of specialty chemical products for a host of end-use markets such as textile, paper, automotive, electronics, personal care, energy, construction, food & beverages and agriculture. These chemicals (including catalysts, surfactants, specialty polymers, coating additives, pesticides and oilfield chemicals) are used based on their performance and have a specific purpose. Specialty chemicals can be single molecules or a combination of molecules referred to as formulations, and they provide a vast range of effects upon which various industries rely. Their compositions significantly influence the performance of the finished products. Specialty chemicals have applications in the manufacturing process of a vast range of products, including paints and coatings, cosmetics, petroleum products, inks and plastics.

What's Shaping the Future of the Chemical Specialty Industry?

Demand Softness Pose Headwinds: Companies in the chemical specialty space are facing headwinds from demand softness in building and construction as well as industrial end markets, especially in Europe and China, due to economic slowdown. Elevated borrowing costs and inflation have taken a bite out of the residential construction industry. Manufacturing activities have also weakened amid softer demand for goods and higher borrowing costs. A slower recovery in economic activities in China is hurting demand in that country. Low consumer confidence and high inflation have also dampened demand in Europe. While customer inventory de-stocking is essentially complete, some lingering impacts of the same in certain markets are expected to continue over the near term. The imposition of hefty tariffs has also introduced significant headwinds for the chemical specialty industry. The soft demand conditions, exacerbated by the weak macroeconomic environment and tariff-induced impacts, are likely to weigh on the volumes of chemical specialty companies. 

Cost Pressure Still a Worry: Specialty chemical makers are facing headwinds from raw material and energy cost inflation, and supply-chain and freight transportation disruptions. Some companies are exposed to challenges from elevated logistics and labor costs. Tariffs have led to increased costs for raw materials, resulting in higher production expenses for the industry players. The lingering impacts of inflationary pressures are expected to continue over the short term and weigh on the margins of chemical specialty companies.

Strategic Actions to Aid Results: The companies in this space are executing a raft of self-help measures — including cost-cutting and productivity improvement, expansion into high-growth markets, restructuring, operational efficiency improvement, and actions to strengthen the balance sheet and boost cash flows — in a bid to stay afloat amid the prevailing headwinds. The industry participants are aggressively implementing actions to cut costs. The measures are likely to help companies sail through the ongoing challenges.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Chemicals Specialty industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #191, which places it in the bottom 21% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a gloomy near-term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

 

Industry Underperforms Sector & S&P 500

The Zacks Chemicals Specialty industry has underperformed the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.

The industry has gained 0.4% over this period compared with the S&P 500’s rise of 16.7% and the broader sector’s increase of 38%.

One-Year Price Performance

 

Industry's Current Valuation

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing chemical stocks, the industry is currently trading at 12.75X, below the S&P 500’s 18.97X and the sector’s 16.71X.

Over the past three years, the industry has traded as high as 12.99X, as low as 9.95X, with a median of 11.79X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio

Enterprise Value/EBITDA (EV/EBITDA) Ratio 

3 Chemical Specialty Stocks to Keep a Close Eye on

Sociedad Quimica: Chile-based Sociedad Quimica produces plant nutrients, iodine, lithium and industrial chemicals. It is benefiting from being the low-cost producer of potassium chloride, potassium sulfate and potassium nitrate. SQM is gaining from the favorable trends in the lithium market underpinned by strong electric vehicle (EV) sales. Higher demand is also expected to continue to support the company’s lithium sales volumes. Strong demand from EVs and energy storage systems, along with supply disruptions, is driving an improvement in lithium prices. Iodine volumes are being boosted by growing demand following the post-pandemic recovery. SQM is expected to benefit from its investment in expanding production capacity. Its Specialty Plant Nutrition business is also seeing higher demand across key end markets. 

Sociedad Quimica, carrying a Zacks Rank #1 (Strong Buy), has an expected earnings growth of 180.6% for 2026. The Zacks Consensus Estimate for 2026 earnings has been revised 65.9% upward over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: SQM

Element Solutions: Florida-based Element Solutions is a leading specialty chemicals provider, offering innovative and differentiated solutions to its customers across a vast spectrum of industries. ESI is poised for growth, driven by strong execution and strategic positioning in the electronics sector, which underpins its robust long-term growth outlook. The company is benefiting from the strength in the electronics market. It is seeing strong organic growth in its Electronics segment, offsetting weakness in the industrial space. High-value end markets are contributing to a favorable product mix, while the ongoing pricing and productivity initiatives and lower raw material costs are boosting margins. The recently closed Micromax acquisition has strengthened its position to build an industry-leading Electronics portfolio. The acquisition of EFC Gases & Advanced Materials also added higher value and differentiated offerings in specialty and rare gases, along with advanced materials.

ESI has an expected earnings growth of 15.6% for 2026. The consensus estimate for Element Solutions’ 2026 earnings has moved 1.2% upward over the last 60 days. ESI surpassed the Zacks Consensus Estimate in three of the trailing four quarters. It has a trailing four-quarter earnings surprise of roughly 2.7%, on average. ESI currently carries a Zacks Rank #3 (Hold).

Price and Consensus: ESI

Flexible Solutions: Canada-based Flexible Solutions specializes in biodegradable, water-soluble products as well as energy and water conservation products for drinking water, agriculture, and industrial markets. The company remains committed to exploring new opportunities in applications such as detergent, water treatment, oil field extraction and agriculture to further expand sales in the NanoChem division, which accounts for a significant portion of the company’s revenues. FSI's cash resources are also expected to be adequate to meet its cash flow requirements and future commitments. FSI is expanding its presence in the food and nutrition supplement manufacturing markets. 

Flexible Solutions, carrying a Zacks Rank #3, has an expected earnings growth rate of 212.5% for 2026. The consensus estimate for FSI’s 2026 earnings has been stable over the last 60 days.

Price and Consensus: FSI

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Element Solutions Inc. (ESI): Free Stock Analysis Report
 
Sociedad Quimica y Minera S.A. (SQM): Free Stock Analysis Report
 
Flexible Solutions International Inc. (FSI): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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