Global real GDP growth was robust at 3.4% last year. However, with policy tightening and geopolitical tensions, growth is likely to ease to 2.8% in 2023. Further, the International Monetary Fund expects GDP growth to accelerate to 3% in the coming year. Considering the data, global recession fears have declined meaningfully. Therefore, I believe it’s a good time to consider exposure to some of the best commodity stocks.
Other factors also support the bull thesis for commodities. First, interest rates might have peaked globally, and with a dovish fed, the dollar is likely to weaken. This will support the upside in industrial commodities.
Further, several metals will likely be a part of the global energy transition. Even with relatively sluggish economic growth, these metals will likely witness strong demand and price uptrends. Considering these factors and the valuations, total returns in commodity stocks will surprise investors in the next five years.
Rio Tinto (RIO)
Rio Tinto (NYSE:RIO) is undervalued at a forward price-earnings ratio of 8.9 times. The stock also offers an attractive dividend yield of 7.18%. For year-to-date, RIO stock has been sideways. As recession fears decline and commodities trend higher, I expect a breakout.
An investment-grade balance sheet and robust free cash flows are the key reasons to be bullish on Rio Tinto. The company has reported an FCF of $36.1 billion in the last three years. Financial flexibility is therefore high for making capital investments.
It’s also worth noting that Rio is investing in metals that will benefit from the global energy transition. This includes lithium, copper, and aluminum. While iron ore remains the cash flow machine, Rio will likely be well diversified in the next five years. To put things into perspective, the company will be the largest source of lithium supply in Europe over the next 15 years.
Freeport-McMoRan (NYSE:FCX) stock has remained in an uptrend with a rally of 63% in the last 12 months. This does not come as a surprise, with copper being an important part of the global energy transition. Further, copper prices have trended higher in the last few weeks on a relatively weaker dollar.
In terms of copper fundamentals, the total demand last year was 25 million tonnes. It’s expected that demand will double to 50 million tonnes by 2035. With a potential supply gap, copper price realization will likely continue to improve for Freeport.
For Q1 2023, the company reported operating cash flow of $1.1 billion and net debt of $1.3 billion. With healthy cash flows and a strong balance sheet, Freeport is well-positioned to benefit.
Through 2025, Freeport has guided for stable copper production. Given the financial flexibility, opportunistic acquisitions might be on the cards to boost production and revenue growth.
Albemarle Corporation (ALB)
Albemarle Corporation (NYSE:ALB) is among the best commodity stocks to buy as recession fears ease. The lithium play is poised for multibagger returns in the next five years. At a forward price-earnings ratio of 10.1, the stock is worth accumulating.
An important point to note is that there will likely be a lithium surplus in 2023. That’s one reason for the stock to be depressed. However, by 2035, the lithium supply gap is expected to be 24% of the demand. This will imply a steady rise in lithium prices.
Specific to Albemarle, the company has aggressive growth plans. For the current year, revenue growth is expected from 35% to 55%. Further, Albemarle has guided lithium sales volume growth at a CAGR of 20% to 30% through 2027. Therefore, cash flow upside along with healthy dividend growth is impending.
On the date of publication, Faisal Humayun did not hold (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.