Improved demand for paint should prime producers of titanium dioxide

Fidelity's Emma Baumgartner is taking a fresh, new look at producers of titanium dioxide amid improved demand for architectural coatings and an expected rebound in existing home sales.

• 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.
• 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, 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 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.