Commodities are red-hot. Supply and demand are important factors in determining commodity prices. For example, extremely cold weather means higher demand for natural gas and hence higher prices. Commodity prices typically follow inflation levels, too. Equity markets have been jittery in recent weeks, in part due to the expectation of higher inflation.
Many investors also regard commodities as a hedge against inflation. Given the increase in the share price of many commodity stocks, market participants want to ride the wave, too. Therefore, today’s article introduces the seven best stocks to buy to participate in the commodities rally.
You might already know that commodities are typically divided into hard and soft commodities. Hard commodities include natural resources that are mined or extracted from the earth. They include metals, such as gold, silver, iron and copper, as well as oil or natural gas. On the other hand, soft commodities include those that can be grown, harvested or reared. Examples include, wheat, corn, lumber, coffee, cattle or hogs.
Research on agricultural commodities and stocks that was led by Hector O. Zapata of Louisiana State University highlights, “the history of U.S. stock and commodity prices has been characterized by recurring super cycles that last several decades … [M]any U.S. agribusiness companies are often considered defensive investments and defensive stocks (i.e., stocks with a risk level less than the overall market).”
There is, in fact, typically a negative correlation between commodities and stocks. Academic research further shows that by investing in commodity stocks, futures or exchange-traded funds (ETFs), market participants may be able to decrease the volatility of an all-stock portfolio without reducing their expected return.
In investing, the trend is your friend. And the longer-term trend in many commodities looks higher. With that information on commodities, here are our seven stocks to buy in June.
- Archer-Daniels-Midland (NYSE:ADM)
- Bunge (NYSE:BG)
- Global X Silver Miners ETF (NYSEARCA:SIL)
- Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (NASDAQ:PDBC)
- Nutrien (NYSE:NTR)
- VanEck Vectors Agribusiness ETF (NYSEARCA:MOO)
- West Fraser Timber (NYSE:WFG)
Stocks to Buy: Archer-Daniels-Midland (ADM)
52-week range: $36.30 – $68.68
Dividend yield: 2.21%
Chicago, Illinois-based Archer-Daniels-Midland is a major processor of oilseeds, corn, wheat and other agricultural commodities. Its end products include vegetable oil and meal, corn sweeteners, flour, feed ingredients, ethanol and natural flavors.
The company announced Q1 results at the end of April. Consolidated revenues were up by 26.2% year-over-year (YoY) to $18.89 billion. ADM experienced robust growth in all of the segments, other than South American ag service and oilseeds operations.
Bottom line growth was more impressive with 76.2% YoY. ADM’s net profit, which was $391 million in Q1 a year ago, rose to $689 million, or $783 million after adjustments. Similarly, diluted earnings per share (EPS) jumped from 69 cents last year to $1.22 (or $1.39 after adjustments) this year. Additionally, cash and equivalents totaled $5.852 billion.
CEO Juan Luciano stated, “Our outlook today is even more optimistic than what we shared at the beginning of the year. We expect significant year-over-year growth in earnings across all three of our businesses in 2021, and continued sustainable growth in the years to come.”
Since the start of the year, ADM stock has returned 33%. The stock is currently trading at 15.27x of its consensus forward price-to-earnings (P/E) and 0.55x its price-to-sales (P/S) ratio. Growth for demand in soft commodities from China has provided tailwinds for the shares. Given the recent increase in price, profit-taking could be around the corner. Therefore, a potential decline toward $63 would improve the margin of safety.
Bunge (BG)
52-week range: $36.93 – $92.38
Dividend yield: 2.42%
Chesterfield, Missouri-headquartered Bunge has the largest oilseed processing capacity globally. The company sells packaged vegetable oils and other food and ingredients products.
The group released its Q1 figures in May. The top line grew by 41.3% YoY to $12.961 billion. The bottom line turned black this year. Bunge, which reported $184 million net loss in a year ago, showed a $831 million net profit in the first quarter of this year. Additionally, adjusted net income per common diluted share reached $3.13 in Q1 versus $0.91 a year ago. Furthermore, the quarter-end cash and equivalents stood at $226 million.
CEO Greg Heckman commented, “We are optimistic that the favorable demand environment in the first quarter will continue through 2021.” As a result, the company revised its previous adjusted EPS guidance for 2021. Management now expects to achieve adjusted EPS of approximately $7.50 per share, as compared to the 2020 realized figure of $8.30.
So far in 2021, the shares are up 33%. BG stock’s forward P/E and current P/S ratios are 11.76x and 0.29x, respectively. In the past several months, Bunge’s agribusiness drove earnings forward. If you believe the trend could continue, you should consider buying into the declines.
Stocks to Buy: Global X Silver Miners ETF (SIL)
52-week range: $31.94-$52.87
Dividend yield: 1.84%
Expense ratio: 0.65%, or $65 on a $10,000 investment annually
Our next discussion centers around an exchange-traded fund (ETF). The Global X Silver Miners ETF offers access to a broad range of silver mining companies. It follows the Solactive Global Silver Miners Total Return index. Many individuals regard gold and silver as a store-of-value and a hedge against inflation.
The top three companies in the ETF are Wheaton Precious Metals (NYSE:WPM), Polymetal International (OTCMKTS:POYYF) and Pan American Silver (NASDAQ:PAAS), accounting for about 40% of the fund. All three companies have had strong cash flows in recent months.
SIL can be regarded as a leveraged play on the price of silver. As its rises, miners’ margins tend to improve, and their profits increase. The same holds true for gold miners, too. When silver and gold prices rise, investors typically become fairly bullish on miners.
Year-to-date (YTD), SIL is up around 5.6%. I believe the bull run in silver is just beginning and that capital inflows into both silver and silver mining shares could be around the corner. Therefore, interested investors could buy the fund around these levels.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
52-week range: $12.00-$19.74
Dividend yield: 0.01%
Expense ratio: 0.59%
The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF invests in commodity-linked futures and other financial instruments that provide access to a diverse group of commodities.
PDBC aims to provide a long-term capital appreciation strategy that surpasses the performance of DBIQ Optimum Yield Diversified Commodity Index Excess Return, an index composed of futures contracts on 14 commodities.
WTI Crude, gasoline, NY Harbor ULSD and Brent Crude futures have the highest weightings, comprising more than 57% of the funds. Gold, soybeans, corn, sugar and wheat make up about 26% of the fund, while copper, natural gas, aluminum, zinc and silver compose the rest.
As the above weightings show, the fund has significant exposure to energy markets. Since the lows hit in March 2020, energy markets have had a spectacular comeback. For instance, the Dow Jones U.S. Oil & Gas Index has returned 34% in the past 12 months. Meanwhile, in recent weeks, we have seen record highs in lumber, copper and palladium. Grains, which are essential ingredients in many food products, have also seen explosive price action.
As a result of these bullish trends, YTD, the fund is up over 25%. Short-term profit-taking is likely. Interested investors would find better value around $17.50. If you believe money’s purchasing power will decline in the coming quarters, then PDBC needs to be on your shopping list.
Stocks to Buy: Nutrien (NTR)
52-week range: $30.56–$62.37
Dividend yield: 3.07%
Saskatchewan, Canada-headquartered Nutrien is the world’s largest fertilizer producer by capacity. Although the company’s main focus is potash, it also produces the other two main crop nutrients, namely nitrogen and phosphate.
Nutrien is also the largest agricultural retailer stateside, selling fertilizers, crop chemicals, seeds and services directly to farm customers through both physical stores and online platforms.
In late April, the group announced its Q1 earnings. The top line rose by 11% YoY to $4.658 billion. The bottom line, which was in red in a year ago (-$35 million), turned black this year and came in at $133 million. Additionally, diluted EPS was 22 cents. Cash and equivalents totaled $712 million.
CEO Mayo Schmidt commented, “Our earnings and free cash flow results highlight the strength of our integrated business model, execution of strategic initiatives and the recovery in global agricultural markets. Nutrien delivered a record first quarter for retail and strong fertilizer volumes and margins.”
Nutrien raised full-year 2021 adjusted net earnings per share and adjusted EBITDA guidance to $2.55-$3.25 per share (versus $0.81 in 2020) and $4.4 billion-$4.9 billion (versus $2.891 billion in 2020), respectively.
Since the start of the year, the stock is up nearly 27%. NTR shares are trading at 19.65x their consensus forward P/E. Furthermore, the stock’s P/S ratio stands at 1.6x. A potential decline toward $55 would improve the margin of safety. If the bull market in the agriculture industry continues, this leading fertilizer name will continue to see new highs.
VanEck Vectors Agribusiness ETF (MOO)
52-week range: $56.78-$95.16
Dividend yield: 0.91%
Expense ratio: 0.55%
The VanEck Vectors Agribusiness ETF provides exposure to a broad range of companies involved in agri-chemicals, animal health, fertilizers, seeds, farm equipment, livestock, trading of agricultural products and plantations — such as grain, oil palms, sugar cane, tobacco leaves and grapevines.
MOO tracks the MVIS Global Agribusiness index and includes 52 stocks. The top 10 holdings constitute over 37% of the fund’s total net assets — around 1.3 billion. The largest five holdings are Zoetis (NYSE:ZTS), Deere (NYSE:DE), Bayer (OTCMKTS:BAYRY), Idexx Laboratories (NASDAQ:IDXX) and Nutrien.
YTD, the fund is up 19%. Interested investors would find better value around $85. Personally, I like the diversity of the fund as well as the quality of the names held in MOO.
Stocks to Buy: West Fraser Timber (WFG)
52-week range: $26.93-$91.53
Dividend yield: 0.84%
Our final stock comes from Canada. West Fraser Timber is a diversified wood products company that produces lumber, engineered wood and other products including pulp, newsprint, wood chips and renewable energy.
The company has more than 60 facilities in Canada, the U.S. and Europe and is one of the most important lumber names in North America. Many InvestorPlace.com readers are likely to know that lumber has had a meteoric rise in 2021.
On May 6, West Fraser Timber announced Q1 results. Sales increased to $2.343 billion, up 163% YoY. Earnings came to $665 million, 73.9x higher YoY. Similarly, diluted EPS was $6.96, versus a loss of 9 cents per share same period a year ago. Cash and short-term investments stood at $1.4 billion versus $66 million a year ago.
In the conference call, management was optimistic about the demand for the rest of the year. In fact, in the past several months, the red-hot housing market and the lumber shortage have been among the catalysts behind gains in lumber shares.
YTD, the shares are up about 12%. Forward P/E and P/S ratios are 3.06 and 0.95, respectively. Potential investors could consider buying WFG stock around these levels.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
