Why copper, silver, and oil make sense

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Just three words: copper, silver, and oil.

The simple truth is that global growth is coming back--Greece or no Greece--and investors are positioning for the steady and reliable momentum that occurs in the second half of an expansion. The places that look most interesting to me, given their levels and the economic backdrop, are commodities such as the three mentioned above.

Oil has been getting the most attention and will probably remain the most talked-about commodity in coming months. That's why on Feb. 8 I recommended the sector via the XLE Energy Select Sector SPDR fund (XLE).

Despite the recent gains, many oil stocks remain at depressed levels. Recent option activity suggests that buyers are now fishing around for bargains. Big names like BP , Marathon Petroleum , and Hess led the charge in January and have been followed by more lesser-known names such as Hercules Offshore (HERO), Harvest Natural Resources (HNR), Patterson UTI Energy (PTEN), Oasis Energy (OAS), and Abraxas Petroleum (AXAS).

Some of these, especially AXAS, are "wildcatters"--high-risk, high-reward exploration stocks that will have the most leverage to higher crude prices. Others, including PTEN and HNR, were sitting at long-term support, but there simply weren't enough sellers to send them lower.

HNR is also interesting because it operates mainly in Venezuela, where long-term president/wannabe-dictator Hugo Chavez could potentially be forced from office this year. He has been dealing with cancer and now faces a serious political challenge from Henrique Capriles in the Oct. 7 national elections.

There aren't many ways in the stock market to bet against Chavez, but HNR provides that exposure. Many investors hate Chavez, so this stock could catch fire if he moves down in the polls.

The chart of oil is also quite bullish: It has been making higher lows and consolidating above its 200-day moving average. Light sweet crude has also found support above the key $103 level that was resistance in late 2007 and early 2008 before it made that crazy run toward $147. We could now be setting up for a move back to that level.

The next consideration is the economy. Europe was supposed to be in recession by now, according to the bears, but Germany and France have issued a series of better-than-expected GDP reports. We also got a strong ZEW survey (German investor confidence) and good data recently from the Federal Reserve Banks of New York, Philadelphia, and Chicago. So much for the bears.

(Another quick point is that higher oil prices won't be nearly as bad for the U.S. economy as it would have been in the past because we've been increasing energy production for several years. I believe that it will actually be much more positive than most of the "experts" on television declare.)

Next, what's good for oil is also good for copper and silver. Both are industrial metals, and both have shown some very interesting price action in recent weeks. I would also mention platinum and palladium because they tend to follow silver in particular. Recently we saw big call buying in Stillwater Mining , which focuses on those two metals.

In copper, you can look to Southern Copper (SCCO) and Freeport-McMoRan Copper & Gold (FCX), which have both had nice pullbacks and are now finding support at their late-2011 highs. Silver has the iShares Silver ETF (SLV) or producers like Silver Wheaton (SLW) and Coeur d'Alene Mines (CDE). I personally own the highly leveraged ProShares Ultra ETF (AGQ).

If oil spikes, solar stocks could get driven back up. Those of you who've read my columns know I've been hating this sector more than a trip to the dentist. But they now trade at huge discounts to book value and have lots of short interest. Canadian Solar (CSIQ) was also on Heat Seeker last week.

Finally, a stock that has been grabbing my attention is DirecTV (DTV). It had big call roll last recently, and its earnings have been pretty good. Investors have been worrying about increased U.S. competition, but the real story is growth in Latin America.

If I am right about commodities, emerging markets will rally at some point and investors will pay more attention to that aspect of the company. The shares appear to have some nice support down here at the early January peak around $44 to $45 and have been working their way higher since last summer.

Considering its long-term growth potential, this stock looks pretty cheap at 8 times forward earnings--especially given its size.

Disclosures:
I own AGQ and SCCO.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Feb. 22.)



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


This article appears in: Investing , Options

Referenced Stocks: AXAS , FCX , PTEN , SLV , SLW

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