Commodity stocks help diversify long-term investment portfolios. The range of commodities to consider varies from energy sources (such as oil, natural gas, and coal) to metals (including precious, rare and industrial) and agricultural produce (such as corn, coffee or wheat). Therefore, for retail investors, it can feel overwhelming to choose shares of businesses that focus on commodities. Today’s article discusses seven commodity stocks to buy in the rest of the year.
2021 has so far seen the world navigate its way slowly out of the health and economic crises levied by the pandemic. As a result, we’re also seeing more demand for goods and services. And commodity stocks are gaining attention as a result.
According to recent metrics from the Organisation for Economic Co-operation and Development (OECD), “Global economic growth is now expected to be 5.8% this year, a sharp upwards revision from the December 2020 Economic Outlook projection of 4.2% for 2021. The vaccines rollout in many of the advanced economies has been driving the improvement, as has the massive fiscal stimulus by the United States.”
This kind of economic improvement could signal opportunity in various commodities in the coming months. With that information, here are seven commodity stocks to consider in the near future:
- Archer-Daniels-Midland (NYSE:ADM)
- Energy Fuels (NYSEAMERICAN:UUUU)
- Global X Silver Miners ETF (NYSEARCA:SIL)
- iPath Bloomberg Commodity Index Total Return (SM) ETN (NYSEARCA:DJP)
- iShares MSCI Brazil ETF (NYSEARCA:EWZ)
- Schweitzer-Mauduit International (NYSE:SWM)
- West Fraser Timber (NYSE:WFG)
Commodity Stocks for a Covid World: Archer-Daniels-Midland (ADM)
52-week range: $44.02-$69.30
Dividend yield: 2.51%
Chicago-based Archer-Daniels-Midland is a major processor of oilseeds, corn and wheat, as well as other agricultural commodities. Additionally, ADM owns an extensive network of logistical assets to store and transport crops worldwide. Some of its end products include vegetable oil, corn sweeteners, flour, feed ingredients, other industrial products.
The company announced Q2 results at the end of July. Top line saw a 41% year-over-year (YOY) growth and came at $22.93 billion. Net earnings rose 52% YOY to $712 million. Adjusted diluted EPS grew from 85 cents to $1.33 over the past year. The company ended six months with $869 million cash.
On the results, CEO Juan Luciano cited, “It was yet another excellent quarter for ADM, as our team delivered record earnings, with strong year-over-year profit growth across all three business units.”
He also commented in the earnings call following the earnings release and said, “Now as we enter the next stage of our growth, … we believe our medium-term annual earnings trend growth rate will be in the high single-digit percentages from these $4 to $4.50 per share baseline.”
Year-to-date (YTD), ADM stock is up over 15%, and saw an all-time high (ATH) in early June. During the first half of the year, agricultural commodity prices reached new highs and so did ADM shares. But since then, the stock has declined close to 20%.
Consensus forward price-to-earnings (P/E) stands at 12.39x, and the shares are trading at 0.45x sales. The recent decline offers a good opportunity to buy into the ADM share price. The company is highly regarded for its financial stability and dividend hikes.
Energy Fuels (UUUU)
52-week range: $1.42-$7.83
According to the World Nuclear Association, “A large amount of uranium is in rare earth deposits, and may be extracted as a by-product. Higher uranium prices and geopolitical developments would enhance the economic potential for recovering these. Rare earths are essential for many modern technologies. Growth in electric car use will depend, in part, on the availability of rare earths.”
Energy Fuels focuses on uranium extraction and sales. It also acquires uranium properties and recycles uranium bearing materials generated by third parties. Its final uranium product, uranium oxide concentrate, is sold to customers for further processing into fuel for nuclear reactors. Energy Fuels also produces vanadium as a co-product of its uranium recovery.
The group released Q2 figures in late July. Total revenue came at $0.809 million. A year ago, revenue had been $0.788 million. Net loss, which was $8.2 million in Q2 2020, further deteriorated to $10.8 million in Q2 2021, mainly as a result of $3.6 million non-cash mark to market warrant liabilities. Diluted loss per share was 15 cents. Q2 end cash and equivalents totalled to $79 million.
CEO Mark S. Chalmers stated, “Energy Fuels achieved another significant milestone in restoring U.S. rare earth supply chains when we recently announced the successful production of rare earth carbonate from the U.S.-sourced natural monazite sand at our White Mesa Mill.”
Management highlighted that although the outlook for uranium continues to improve, uranium prices have not risen enough to justify uranium production at the company’s mines and facilities. Hence, the company reduced its uranium production guidance for 2021 from 60,000 pounds to 30,000 pounds.
So far in the year, UUUU stock is up about 15%. The rare earth mining space is a specialized area where not many U.S. businesses exist. Investors interested in owning stakes in uranium could consider buying the shares around these levels. However, we should remind readers that the company has little revenue and no profits, so it is also a speculative play.
Commodity Stocks for a Covid World: Global X Silver Miners ETF (SIL)
52-Week Range: $37.13-$51.35
Dividend Yield: 2.14%
Expense Ratio: 0.65% per year
Our next discussion centers around an exchange-traded fund (ETF). The Global X Silver Miners ETF focuses on silver mining companies. The fund began trading in April 2010, and net assets stand at $1.4 billion. SIL currently has 40 holdings. Close to 59% of the miners are based in Canada, followed by Russia (12.4%), the U.S. (9.8%) and South Korea (6.2%).
Among the top companies in the roster are Wheaton Precious Metals (NYSE:WPM) and Polymetal International (OTCMKTS:POYYF).
Markets typically regard precious metals like silver and gold as inflation hedges. And a fund like SIL can be sees as a potential play on the price of silver. As the price of silver rises, miners’ margins usually improve, leading to higher profits.
So far this year, SIL is down around 15%. Bullish investors could regard this decline as a good opportunity to buy into the fund.
iPath Bloomberg Commodity Index Total Return ETN (DJP)
52-Week Range: $19.04 – $28.27
Expense: 0.70% per year
Next on our list is an exchange-traded note (ETN), or an unsecured debt security issued by a financial group such as a bank. Before we discuss the specific ETN for today, let’s first introduce several aspects of such notes.
When it comes to the value of an ETN, the credit rating of the underwriting issuer is important. Thus, the price of the ETN could decline if the credit of the underwriter goes down.
The most important issuers of such ETNs are global heavyweights such as Barclays (NYSE:BCS), Morgan Stanley (NYSE:MS) or UBS (NYSE:UBS). Although their names inspire confidence that these banks could always repay these notes, we need to remember that default risks exist. When Lehman Brothers collapsed over a decade ago, investors in ETNs issued by the failed group were left with unsecured claims.
Returns to an investor generally come from trading the ETN. Market prices of ETNs fluctuate like stocks or ETFs. Our ETN for today, namely, the iPath Bloomberg Commodity Index Total Return (SM) ETN, is issued by Barclays Bank.
DJP’s current holdings include: gold (11.53%), WTI crude oil (9.91%), natural gas (9.24%), Brent crude (8.00%), corn (5.76%), copper (5.32%), soybeans (5.11%), aluminum (4.44%), soybean oil (3.89%) and silver (3.56%).
YTD, the ETN is up about 24%, hovering around $27. Many analysts concur that supply-demand conditions worldwide should support commodity prices in future months as well.
Commodity Stocks for a Covid World: iShares MSCI Brazil ETF (EWZ)
52-Week Range: $26.56 – $42.05
Dividend Yield: 2.57%
Expense Ratio: 0.59% per year
Our next fund focuses on a country, namely Brazil, one of the most important players in the commodity space. The iShares MSCI Brazil ETF invests in 53 companies in the country. The fund started trading in July 2000 and has around $5.71 billion in assets.
In terms of the sub-sectoral breakdown, the Materials sector makes up the highest portion with 24.88%, followed by the Financials and Energy sectors with 23.97% and 12.68%, respectively. The fund’s top 10 holding account for 57% of all holdings in the fund.
Leading iron manufacturer Vale (NYSE:VALE) and financial services company Itaú Unibanco Holding S.A. (NYSE:ITUB) lead the list in the holding weight.
Over the past year, EWZ is up about 21%. Potential investors could regard the dips in the fund as a good opportunity to buy. With a population of around 212 million, Brazil is one of the most important names in Latin America. Through EWZ, investors would have access to both the growth in the country and commodity names.
Schweitzer-Mauduit International (SWM)
52-week range: $26.73– $50.79
Dividend yield: 4.71%
Alpharetta, Georgia based Schweitzer-Mauduit International manufactures resin-based products used in specialty applications, such as in filtration, infrastructure, transportation and industrial, as well as medical end-markets. It also produces cigarette papers and reconstituted tobacco products for cigarette and cigar manufacturers, and other non-tobacco paper products.
The second-quarter financials showed that top line grew by 48.6% YOY and total sales came at $377.8 million. But net income went down by 91.6% YOY to $1.8 million. GAAP EPS was 6 cents, down from 69 cents, and included 57 cents per share of incremental expenses related to the acquisition of U.K.-based Scapa. Adjusted EPS was flat at $0.90 compared to the prior year. June-end cash levels stood at $65.9 million.
Following the results, CEO Dr. Jeff Kramer commented, “Excluding the benefit of the Scapa acquisition, overall sales increased double-digits, and we are confident that robust order activity will continue in the coming quarters. We also closed and began integrating the largest acquisition in our history, as Scapa joined our portfolio, putting us in even better position to drive sustainable long-term profit growth.”
For the second-half of the year, the company expects price increases to mitigate inflationary pressures for the advanced materials and structures segment.
Analysts expect the Scapa deal to allow the company to grow inorganically, and reduce the impact of tobacco-related sales on the metrics. Scapa manufactures industrial adhesives, foams, films for industrial applications and healthcare markets.
YTD, SWM stock has lost about 6%. In March, the shares hit a multi-year high. But since then they have come under significant pressure. Its P/S ratio stands at 0.95x. The recent decline in the share price offers a robust opportunity to buy into SWM.
Commodity Stocks for a Covid World: West Fraser Timber (WFG)
52-week range: $45.03– $91.53
Dividend yield: 1.1%
Canada-based West Fraser is a diversified wood products company with facilities worldwide. It produces lumber, engineered wood products, pulp and wood chips. West Fraser’s products are used in home construction, repair and remodeling, industrial applications, papers, tissue and box materials.
According to the second-quarter financials, the top line increased from $921 million in Q2, 2020, to $3.779 billion in Q2, 2021. Net earnings of $1.488 billion translated into diluted EPS of $12.32. The company finished the quarter with $2.231 billion cash and short term investments.
In terms of outlook, management cited, “The wildfires are affecting access to logging areas in some of our operating areas and impacting transportation networks we rely on to move our products. This has resulted in temporary suspensions of production due to raw material shortages, evacuation orders and difficulties in moving our finished product by truck and rail. At this time, we cannot estimate when the situation will be alleviated or estimate the impact on our production and shipments.”
YTD, the stock is up nearly 18% and hit a record high in mid-May. Consensus forward P/E ratio is 2.6x and P/S ratio is 0.7x. Potential readers could consider investing 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.
Tezcan Gecgil, Ph.D., 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 three 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.
