by Jeff Reeves | August 14, 2012 10:47 am
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.
You can find oil stocks with bigger yields. But there’s no bigger oil stock than Exxon Mobil (NYSE:XOM), and its breadth of operations not only provides stability but also your best shot at tapping into a surge in crude oil.
Plainly put, though oil is down from its high of $112 in the last year, there’s nowhere for energy prices to go but up in the long-term. Even with the global economy ailing, international demand is flat or up slightly based on full-year 2012 projections. Any strength from a stimulus in China or a breakout elsewhere will tip the scales clearly toward the demand side.
And while you wait, depend on XOM stock with a reasonable valuation (P/E of around 11 on fiscal 2013 earnings), great management (25% return on equity that trumps every other oil major) and a bedrock dividend history that includes 49 years of consecutive dividend increases. The headline yield of 2.6% doesn’t burn down the house, but that will surely increase over time.
One of the easiest demographic investments you can make is on agriculture. The world population is going to keep growing, and those are more mouths to feed. Thus, while I like a number of agricultural stocks including Deere (NYSE:DE) and Potash (NYSE:POT), the Market Vectors Agribusiness ETF (NYSE:MOO) is perhaps your best bet to get a diversified play on the entire sector.
The fund has a 0.53% expense ratio, but that’s reasonable for diversification on the sector it gives you. Top components include Potash and Deere as well as seed giant Monsanto (NYSE:MON) and pesticide blue chip Syngenta (NYSE:SYT). There are fewer better ways to spread your money around the agricultural sector right now than this focused agricultural ETF.
And since the unexpected can and will happen — as this year’s drought will attest — a little diversity can help smooth out any performance as opposed to a purer agricultural commodity play that may whipsaw you around.
The fund also yields a nice 2.6% dividend based on the last four distributions, though the payouts are a bit volatile.
What would a commodity list be without gold and the SPDR Gold Trust ETF (NYSE:GLD)? I, for one, do not buy the nonsense about gold as a store of value or some kind of bedrock currency for the apocalypse. But I do, however, place credence in the idea of gold as a speculative investment — one that can make you money or lose you money depending on the timing of your buy.
Summertime has given us a bottom in gold prices as the market has rallied. It’s just 5% off its low of October 2011. Considering the growing uncertainty in Washington over federal spending, it may be time to play a buying surge in gold once more after this pullback.
There doesn’t seem to be an immediate rush back into the sector, but on the other hand the downside also seems to be very limited. Most charts show support at or around $1,570 — a hair above the 52-week low of $1,543 and just a short way down from here.
If and when stocks take a tumble as the S&P hovers around levels not seen since the pre-crisis days of 2008, you can expect some of that cash to go into gold and boost this pure-play gold ETF.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a long position in Alcoa but no other stock named here.
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