Dear Mr. Berko:

In mid-2000, I bought 72 shares of Dow Chemical at about $40 a share for about $3,000. As you recommended, I reinvested all the dividends and now have 91.335 shares trading at about $43. I am disappointed that the stock has not done better, especially considering that the market has done so well in the past four or five years. Do you think I should sell and invest in another stock that has better potential? Or if you think I should buy more   Dow Chemical, I have about $2,500 that I could invest for my Individual Retirement Account this year.

E.R., Joliet, Ill.

Dear E.R.:

In 1898, Herbert H. Dow built a commercial bleach manufacturing facility in the United States. Today Dow is nothing like the company Herbie built. Dow makes some of the most important stinky chemicals, plastics, surfactants, polycarbonates, films, solvents, latexes, monomers, natural gas liquids, sodas, resins and epoxies allowed to exist in the cosmos. And there are some of these stinky chemicals in everything we touch, from the bristles on your toothbrush, to the jumbo jets that land at Kennedy, to the bed in which you sleep, to your baby’s play toys, to missiles shot from an F-14.

Though Dow’s earnings and revenues have doubled since 2000, the shares have yet to exceed their high price of $47.60 seven years ago. In fact, share appreciation over the next few years looks about as exciting as watching a Japanese Kabuki play. Earnings for this year are expected to come in at $4.15 per share versus $4.25 for 2006, and 2007 revenues probably will grow less than 2 percent to $49.8 billion. In fact, during the coming years, Value Line, Morningstar, Merrill Lynch and Credit Suisse figure Dow’s revenues will be flat as pizza crust, and that net profit margins will decline from their recent 14.5 percent down to 13 percent by 2010-2011. The $1.50 dividend (it might be raised to $1.60 soon) provides an attractive 3.4 percent yield.

Dow’s blue-blood management at its Midland, Mich., home port are a few eggs short of a dozen. I’m disappointed that these highfalutin fellas who reside in richly furbished, imposing executive offices can’t generate enough enthusiasm to nudge Dow shares higher. I’m also disappointed that Dow’s highly compensated and sweetly perked board of directors placidly condones this seedy stock performance.

But I recommend that you continue to hold your 91.335 shares of Dow even though share price, revenues and earnings are stuck in a rut. Because Dow is vulnerable, poorly managed and trades at lower multiples than its peers, I’m hearing whispered gossip of a private equity buyout. No doubt management will be happy to hand scores of millions of dollars to Wall Street advisers. The backroom wheeling and deal making between Dow management and private bankers is probably in process as you read this.

The company has almost $10 billion in earnings and cash flow. The share price I’m hearing from an acquaintance, a regulator for the New York “Schlock” Exchange, is between $59 and $61 a share. Considering the source of this information, I’d say $60 is an accurate number.

I can’t tell you this is a fait accompli. It could be a year before it happens, but I feel strongly enough about my source to recommend that you purchase 59 more shares and increase your total to 150 shares. An average 17-point gain in share price represents a 40 percent return on your investment. If I’m wrong, there’s little downside peril from the current price, so the low risk might be worth the potentially high reward.

Please address your financial questions  to Malcolm Berko, P.O. Box  1416, Boca Raton, Fla. 33429 or  e-mail him at malber@adelphia.net.  © Copley News Service