I wrote recently on the hopes of cyclical stocks returning to favor, in part due to a secular recovery but also due to rock-bottom valuations with a lot of bad news priced in.
My commodity stock of choice has been Alcoa (NYSE:AA), and though the investment is only slightly better than flat year-to-date because I jumped in a bit early, I’m sticking with this stock in my personal portfolio.
That’s because I believe that a recovery will come — eventually — and boost now-soft prices for base metals. I also believe the strong U.S. dollar will weaken, since it mostly has benefited from the mayhem in Europe and not on the merit of any great fiscal or economic policies at home. A weaker dollar naturally boosts commodity prices from crude oil to gold to aluminum.
I’ve beaten the drum on Alcoa enough, so today I want to give you a few other options to play what I expect to be a big year for commodity and material stocks in 2013. Here are five top commodity investments to buy now:
The underlying price of copper is a huge driver of Southern Copper (NYSE:SCCO) — and as a result, shares crashed almost 40% in 2011 as copper plummeted as much as 35% from its all-time high. But firmer copper pricing has meant firmer share prices for SCCO in 2012. The stock is up about 10% year-to-date.
That’s not all that impressive because it tracks the market. The big selling point is the dividend. It’s a volatile payday, but Southern Copper yields roughly 6.2% based on the last four distributions. Even if you take the last payment of 24 cents — the lowest in more than two years — and annualize it, you get a respectable yield of 2.8%. Not bad considering the upside if things are better on the dividend front going forward.
Lastly, as I wrote in a more in-depth endorsement of Southern Copper, this stock also holds molybdenum and zinc reserves. Molybdenum is a rare earth metal with high-tech uses, giving investors a small but compelling footprint in this exciting segment of the materials market.
Arcelor Mittal (NYSE:MT) is a steel giant that has seen better days. It’s currently trading at pricing not seen since early 2004, thanks to the global economic slowdown and softness in steel demand. It’s down over 80% from its 2008 peak.
This company is grossly oversold, in my opinion. It hasn’t posted an annual loss at any time during the downturn, which may not sound like a feat but is a decent achievement considering the woes of other material stocks. Arcelor Mittal’s revenue is steadily rebounding from 2009 lows.
Yes, the risks are real: European recession, debt with a junk rating from S&P and tenacious unions that have made cost-cutting difficult. But these are all old news and have been priced into shares. MT now has a forward P/E of about 7.2 based on 2013 earnings.
As long as you keep a long-term view on steel, the bullish case is clear for a bargain buy in steel stocks like Arcelor Mittal. This pick will be first in line to ride a secular recovery in housing or durable goods due to the importance of steel in the global economy. With over $4 billion on the books and just a 26% debt-to-assets ratio, this company isn’t in danger of disappearing anytime soon.
And while you wait for that recovery, MT stock yields over 4%, with a 16 cent quarterly dividend.