Market timing has never been a methodology that I have practiced in the macro sense. However, timing the entry into individual stocks over a period of time based on short-term circumstances is part of my investment strategy. I am not referring to dollar cost averaging where you simply invest a specific amount on a specific schedule. This requires you to buy the stock regardless of price at the scheduled interval. I would rather buy the stock when the price is down for reasons that may be totally unrelated to the company's long-term prospects. This article is not to pit one strategy against another, but rather discuss a specific strategy for accumulating commodity-related stocks.
The timing of your entry into commodity-related stocks is key to making above average long-term returns. Commodity stocks tend to swing by large percentages based on the mood of the day, week or month. Investors can take advantage of these emotional swings when everyone is feeling like commodities have come too far or the economic numbers seem to make some believe we no longer will have a use for energy. In addition, commodities stocks can be impacted by short-term news events that do not impact the longer term prosperity of the company.
This strategy requires that you have conviction in the longer term prospects of the company and commodities in general. You also cannot fall victim to the fear of letting the next best stock "get away". This emotion tends to have you pulling the trigger when the market is hot raising your cost basis. It is not always detrimental, but does tend to reduce your performance over the long-term. Remember, sometimes the best investment strategy can be to sit and wait for opportunities to arise.
Below is a list of stocks that I either currently own or follow that you may want to consider adding to your watch list.
Sprott Resource Corp. (SCPZF.PK) is down 25% from its 2011 peak in early March and is down 14% just this month. Sprott primarily has investments in oil, gold and agriculture. Given its exposure to oil, it would appear the decline in crude has precipitated the fall in the stock price of Sprott. In addition, news of George Soros selling his gold stake may have prompted those holding the stock for its 73,971 ounces of gold out of the stock. The company also announced a merger between its Orion Oil & Gas (OIPZF.PK) subsidiary and Westfire Energy Ltd (WFREF.PK). Westfire will acquire all of the outstanding shares of Orion in exchange for non-listed, non-voting convertible shares of Westfire, which Sprott has agreed to hold for a period 18 months following the closing of the transaction.
I previously wrote about this stock in more detail in February which you can read here. However, keep in mind that the investments of Sprott Resources are very fluid and you should visit the firm's website to get the most up to date details.
Terra Nova Royalty (TTT) is coming off a year of tremendous change in 2010. For an explanation of the events that have transformed Terra Nova into the company it is today, please read this previous article by Clemens Scholl. I believe that confusion over what the company really is and where it plans to go have held the stock price back. However, the company is starting to shed light on its current and future direction. After some positive notes from the year-end earnings release and conference call at the end of March, the stock got a nice boost jumping from under $8 per share to $8.88 before settling at $8.61. Since that time the stock drifted lower, falling below its preannouncement share price. The company then announced first quarter results and the stock again popped over $8 per share, but has drifted lower ever since.
The company's primary driver of revenues is its commodities trading business, however it also has a royalty interest in an iron ore mine in Canada operated by Cliffs Natural Resources (CLF) as well as other investments. I believe the recent sell-off is not as much related to any specific commodity, but rather concern about the overall demand for commodities in the face of some weak economic reports.
U.S. Energy Corp. (USEG) has dropped more than 34% since early April on the back of declining oil prices. U.S. Energy derives nearly all of its revenues from oil and gas operations, but does have some other assets including the Mt. Emmons molybdenum property in Colorado. The company's oil and gas projects are located in the Williston Basin (Bakken/Three Forks formations) in North Dakota, the San Joaquin Basin in California and the Gulf Coast region of Louisiana and Texas.
While falling oil prices have certainly weighed on the stock, the announcement that Thompson Creek Metals Company, Inc. (TC) terminated its option agreement to develop the molybdenum deposit has also put downward pressure on the stock. In addition, the company announced less-than-stellar first quarter earnings, primarily driven by hedging losses and a $2.5 million expense for a single well workover.
Anglo American PLC (AAUKY.PK) is a diversified resources company that has major interests in coal, iron ore, copper, diamonds and the platinum group of metals. The stock has held up well compared to many other commodities stocks down only about 11% from highs reached earlier in the year. This is a larger market capitalization stock and may be preferred by those not wanting the risk of the smaller less diversified companies mentioned.
Anglo American is similar to other major mining behemoths like Rio Tinto PLC (RIO) and BHP Billiton Ltd (BHP). What I like about Anglo American is its unique leverage to diamonds and the platinum group of metals. If you are interested in more detail about Anglo American please read my article: Anglo American: A Diversified Commodities Play With Platinum Exposure.
J.G. Boswell Company (BWEL.PK) is an agriculture company that seems to be hitting the radars of more investors everyday. However, it is still a relatively unknown security. The activity in Boswell shares recently has mimicked the action in cotton prices due to the fact the company is one of the largest cotton farmers around. This may be the best example of a company to accumulate over a long period of time when the price succumbs to the negative whims of the market. The company has vast real estate holdings in California and Australia and produces agricultural products such as cotton, tomatoes, alfalfa, wheat and other specialty crops. In addition, the company also has massive water rights held in the moisture-strained state of California.
While the stock is has only fallen roughly 8% from its highs from earlier this year, it is certainly one to watch. It can be argued that even at current prices it is a screaming value. However, you may have to wait for a very long time for that value to be realized as the stock is very closely held which can put a ceiling on price appreciation without a specific catalyst emerging.
Noble Group (NOBGF.PK, NOBGY.PK) has operations that are similar to the aforementioned Terra Nova Royalty, but on a much larger scale. Based in Hong Kong, Noble is primarily a supplier of commodities to end users around the world. Major products of the company include energy, polymers, petrochemicals, agricultural products, metals and minerals. The stock price of Noble is down roughly 13% from its highs of the year.
Earlier this month it was announced the Noble made a bid for Territory Resources Ltd. (TRRSF.PK) of A$0.50 per share. This exceeds a competing bid from South African miner Exxaro Resources Ltd. (EXXAY.PK) of A$0.46 per share. Territory Resources is a high-grade iron ore miner operating in the Northern Territory of Australia. Noble is already the largest shareholder of Territory Resources with a 32% stake. For a more detail account of Noble, please refer to my previous article Noble Group: An Alternative Commodities Investment.
Pardee Resources Company (PDER.PK) is a diversified resources company with operations in coal, oil and gas, timber, real estate and recent investments in renewable energy. The companies revenues are currently dominated by coal, as illustrated by the companies first quarter earnings. But the company also has large real estate holdings in West Virginia and to a lesser extent Pennsylvania that may have exposure to the prolific Marcellus Shale. The stock has held up well even with the concerns over economic growth as well as low prices for natural gas. The stock did peak earlier in the year about 11% higher than the current price of $250, but it was short lived.
As you can see most of these companies represent a diverse range of commodities within their own respective operations. Investing in commodity related company's with a diverse set of projects reduces specific commodity risk. U.S. Energy is probably the least diversified as nearly all of its revenues are generated from oil and gas. However it does have its molybdenum project which it will probably attempt to monetize and could provide potential upside.
If your preference is to leverage to a specific commodity, but are not interested in buying the commodity directly, there are several stocks and ETFs you can consider. For instance, Eldorado Gold Corp (EGO) which is trading near its 52-week low can give you exposure to gold. You can gain silver exposure by accumulating shares of First Majestic Silver Corp. (AG) or evaluate the silver companies appearing in this article. In addition, gold ETFs such as the SPDR Gold Trust (GLD) and the ETFS Physical Swiss Gold Shares (SGOL) and silver ETFs like the ETFS Physical Silver Shares (SIVR) and the IShares Silver Trust (SLV) can give you more direct exposure to those respective metals. If coal is what has your attention, take a look at Peabody Energy Corp. (BTU). Peabody is one of the largest pure-play coal companies in the world. For oil and natural gas exposure, take a look at one of the many quality companies with oil and gas operations or buy a basket of companies through the closed end fund Petroleum & Resources Corporation (PEO). The fund boasts Exxon Mobil Corp (XOM) and Chevron (CVX) as its two largest holdings, accounting for nearly 25% of total assets.
It is important that you regularly reevaluate your investments. Companies in the commodities space are constantly changing value through acquisitions, discoveries and other economic events. Therefore, if the stock does not necessarily drop back to the levels at which you made your initial investments does not mean you should not accumulate on current weakness if you believe in a positive long-term thesis for commodities.
Finally, the stocks mentioned in this article are not considered to be an exhaustive list of the best commodity related stocks in the world. It is simply a compilation of those I own or follow and I would always be interested in hearing of any new ideas the readers may have.
Disclosure: I am long SCPZF.PK, TTT, BWEL.PK, PDER.PK.