With U.S. inflation reaching historically high levels in recent months, tech stocks have struggled mightily, but commodity stocks have done relatively well.
Since the prices of commodities typically rise roughly in tandem with overall inflation, commodity stocks should stay elevated this year.
Moreover, most of these companies are profitable and don’t borrow large amounts of money, making them good plays for the current market which has become nervous about rising interest rates.
Another important point is that the transition away from fossil fuels and the higher reliance on electricity has created higher demand for a number of metals, especially copper and steel.
Yet despite this transition, oil and natural gas prices are rising because of a number of factors.
Among these causes are the relatively low production of the OPEC+ nations and restraints on the American production of fossil fuels.
Other factors include reduced use of coal and nuclear power in many countries and the strong rebound in demand for oil and natural gas due to the easing of the coronavirus pandemic.
Four great commodity stocks to buy are:
- Cleveland Cliffs (NYSE:CLF)
- Freeport McMoran (NYSE:FCX)
- Chevron (NYSE:CVX)
- Cheniere Energy (NYSE:LNG)
Commisidy Stocks to Buy: Cleveland Cliffs (CLF)
CLF stock has several positive catalysts. One of them is the fact that China, the world’s largest consumer of steel, is stimulating its economy.
Another is the high likelihood of share buybacks. CNBC commentator Jim Lebenthal said on Jan. 21 that the company is on the verge of “massive share buybacks” because the company is reducing its debt. Earlier in January, Lebenthal identified Cleveland Cliffs as his top pick.
Other positive catalysts for Cleveland Cliffs are the coming easing of the chip shortage, which will rejuvenate overall auto manufacturing and the electric vehicle revolution. As the EV boom takes hold, automakers will probably rush to make them and consumers will rush to buy them.
Additionally, the proliferation of wind turbines and solar panels is also likely to boost the overall demand for steel.
Finally, the company should get a big boost from contract renegotiations and government infrastructure spending last year.
According to Marketwatch, the shares are trading at a tiny price-earnings ratio of four.
Freeport McMoran (FCX)
Like Cleveland Cliffs, Freeport should get a big boost from the EV revolution. The company should also benefit from the electrification of transportation and upcoming enhancements to the electric grid in the U.S.
Copper wiring is a critical component of EVs as well as EV charging stations and demand is likely to continue to rise.
Various types of copper accounted for about 78% of Freeport’s revenue in the first quarter of 2021.
“Copper is the new oil,” Goldman Sachs’ Chief Commodity Analyst Jeff Curie said, Seeking Alpha reported on Jan. 17. “It’s conductive characteristics are necessary in almost every major facet of the energy transition.”
FCX stock is trading at a low P/E ratio of 12.4.
Commodity Stocks to Buy: Chevron (CVX)
The price of West Texas Intermediate crude oil has jumped over the $87 mark.
The price could go significantly higher if the tensions between Russia and the West rise further.
With pent-up demand for transportation likely to continue surging as the pandemic eases and spring and summer approach, oil prices probably won’t drop meaningfully anytime soon.
Although Chevron had some trading missteps and other difficulties in Q4, it still managed to generate a very impressive operating cash flow of $9.4 billion.
According to Seeking Alpha, the latter figure should be “more than enough to support the company’s dividend, buyback and investment framework.”
Speaking of its dividend, despite the strong performance of CVX stock in 2021, the shares still provide a high 4.35% dividend yield.
Chevron is also benefitting significantly from meaningful increases in natural gas prices in the U.S. and other countries.
Commodity Stocks to Buy: Cheniere (LNG)
Also benefiting from high natural gas prices around the world is Cheniere, whose facilities enable U.S. natural gas to be easily exported.
The company is taking advantage of the $25+/MMBtu natural gas prices in Europe, versus the roughly $4 prices in the U.S., as gas flows to its liquefied natural gas export terminal recently reached all-time highs.
Cheniere plans to finish or optimize three new facilities this year, enabling it to significantly increase its export volumes.
On Jan. 14, Goldman Sachs named LNG stock as one of its best ideas in the energy sector.
Barron’s was also recently bullish on the shares, reporting that gas purchasers in other nations are looking to sign contracts to import liquid natural gas.
As a result of that trend, Cheniere will generate high sales over the next several years, as the company “has reached supply deals with major Chinese companies in the past few months that should boost its revenue for years,” Barron’s noted.
“We expect LNG contracting activity to remain strong in 2022,” the publication quoted Valery Chow, a vice president at Wood Mackenzie, as saying.
On the date of publication, Larry Ramer held a long position in LNG.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power, Ford, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.