Commodities shape just about every aspect of our lives, from the
cost of a tank of gas to the price of a gallon of milk. But instead
of being subjected to the whims of volatile commodities, smart
investors find a way to soften the blow. Let me explain...
During the summer of 2008, when crude oil prices were near $150 a
barrel, drivers felt a sting in their wallets. But while prices
were high, companies like
raked in record profits. This example doesn't just apply to oil,
either. Many other commodities traded near record highs during that
Take corn. Thanks to ethanol subsidies, the price of corn flour in
Mexico nearly quadrupled in a matter of months in the summer of
2007. And while that country's poor rioted over the cost of corn
tortillas, companies like
Archer Daniels Midland (
made mounds of cash.
During the subprime crisis in the United States, people began
stripping abandoned homes of copper wiring, hoping to capitalize on
high copper prices. And when metals prices were near their highs in
2008, stories began to pop up about some who even went as far as to
steal manhole coverings to be melted down for their base value.
This just didn't occur in one or two places -- it happened in
cities around the world.
I suppose theft is one way to go about profiting from commodities,
but might I suggest something a little safer (and legal) for
investors -- simply buy commodity stocks, namely ones that will do
well when prices are high. With many commodity prices well off
their highs, investors have a chance to pick up some world-class
stocks on the cheap. And because of the boom-or-bust nature of
commodities, many of them will be in a prime position when the time
comes and prices rebound.
Inside the Numbers
focuses on finding these bargains.
Our StreetAuthority research team screened for stocks meeting the
- Energy, agriculture or metal stocks
- Market cap greater than $500 million
- PEG ratio below 1.0
- Debt/Equity under 100%
Here's what turned up:
Company Name (Ticker)
Est. Long Term Growth
Inside the Numbers
identified stocks trading near their 52-week lows that are primed
for a comeback. Not surprisingly, ExxonMobil makes another
appearance here. The stock would appear to be priced slightly below
earnings growth expectations (with a PEG of 0.80), but when we take
the 2.4% yield into account, the stock is fairly priced. (P/E of
16.8 / Growth estimate of 14.4% + 2.4% yield). With that said,
there's not a more obvious "can't miss" stock that will benefit
from a spike in crude prices.
Which brings me to my next point... notice any similarities in the
table? With a few exceptions, all of these stocks are involved in
the oil business.
A few familiar names appear, such as
Weatherford International (
. The oil & gas equipment and services firm turned up when I
examined the portfolio of legendary oilman T. Boone Pickens' hedge
fund, BP Capital. Analysts expect the company to grow earnings +35%
in the next five years, yet the stock is valued at a -38% discount
to its growth potential (a PEG of 0.62).
, a deeply discounted offshore oil driller, is another Pickens
holding worth looking at.
Diamond Offshore (
Ensco International (
Pride International (
are other offshore drillers that have rebounded after crude prices
fell from record highs. But with crude at $80 a barrel (compared
with its summer 2008 peak of $150) and a global recovery beginning
to take hold, nearly all of these drillers could benefit from
Diamond Offshore, in particular, is an interesting candidate for
investors with an income bent. Where Transocean specializes in
deepwater drilling of 10,000 feet or more, Diamond's niche is in
the mid-water drilling business. Also different from Transocean,
Diamond has held back from building new rigs and instead focused on
buying older rigs from cash-starved competitors. This strategy has
insulated Diamond from the build-out glut in the industry and
helped support its generous 8.0% dividend. Going forward, Diamond
will have to invest more in updating its fleet, but should keep
paying a reasonably high dividend to shareholders. (Its dividend
payout ratio is 81%).
Disclosure: Brad Briggs does not own shares of any security
mentioned in this article.
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