Commodities outperformed phenomenally over the past six months. Now, the outlook is a bit uncertain. Here, we will examine two top commodity stock picks — one in metal mining and the other in energy — for the rest of the year.
But first, let’s remember how we got where we are. The excess stimulus spending splurge of global central banks amid the Covid pandemic led to a massive aggregate demand boost in a short time — in a system that had not seen investment on the supply side for decades, given stubbornly low prices. Oil is a good example of this underlying trend. The market and the Fed have slowly woken up to the fact that inflation is actually secular and not transient, as they had been insisting for the majority of last year. The war in Ukraine has exacerbated some trends, but the underlying system in select commodities is still stretched, but it is selective.
Based on this big picture and stock fundamentals, our top pick over the year is Freeport-McMoRan (
FCX) . In the near term, FCX may be vulnerable to a broader economic slowdown and Chinese market dynamics. But it is exposed to copper, which is one of the tightest commodities from an inventory-balance perspective. Over years of under investment, copper supply is going to be quite limited going forward, but the demand will continue to be strong. Infrastructure projects, electric car demand, and the move toward cleaner and more sustainable energy sources all require the use of copper. FCX also has exposure to gold, which is one of the best inflation hedges out there. In 2021, FCX generated about 450% of year-over-year earnings growth and saw its copper sales jump by 18% year-over-year, while gold beat by 35%. Its operating margin is close to 40% and net profit margin about 20% meaning its five year average significantly. We continue to see FCX as one of the best performing stocks throughout the rest of the year.
Our second pick over the year would be a short on Exxon Mobil (
XOM) . Large-cap oil majors have been a preferred play for the broader portfolios, especially as money flows into the energy sector in the short-term as we see Brent oil prices average closer to $115 per barrel, from lows of $20 a barrel amid the height of Covid panic. This has seen a massive boost to oil stocks, including the majors, given their dividend yield. When one compares the forward Brent price curve, these equities tend to be cheap as they are not discounting the entire strength of the oil price, which often tends to be the case. We do not see these oil prices as sustainable, and we know that oil majors tend to underperform on the upside, as well as the downside, because of their low capture rates. In addition, the move to sustainable and “clean” energy is going to place a big burden on the big players to reduce their carbon footprint and invest in alternative forms of energy, which will eat a significant part of their margins for now. Oil price is elevated, given heightened demand in a short time and worries about Russian oil availability. But we see demand destruction along with the supply side picking up toward the second half of this year, which should contain oil prices going forward.
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Source: https://realmoney.thestreet.com/investing/stocks/two-top-commodity-picks-for-the-rest-of-2022-15954713?puc=yahoo&cm_ven=YAHOO&yptr=yahoo