By Jared Cummans
Trading commodities has been popular for many years, as investors can use a number of different resources to gain access to their favorite commodity investments. But it was only a more recent development that commodities earned their keep in a long-term portfolio. Now, a small, but important, allocation to commodities is a necessity of any well diversified portfolio, as these investments offer a number of advantages such as hedging against inflation and maintaining low correlation levels to traditional asset classes.
As investors have begun to embrace commodities with a 5%-10% exposure in their basket of holdings, finding the best options has been something of a difficult task. Looking at a list of all of the commodity options available can be quite overwhelming. For example, when it comes to futures contracts alone, investors have options ranging from natural gas, all the way down to butter. But because futures contracts are designed for active traders, most investors look to equities to establish a strong commodity position for their future.
For these investors, we outline the ‘top dogs’, the largest firms in some of the biggest and most popular commodity sectors in the equity world:
When it comes to agricultural chemicals, there are a number of big names, but PotashCorp (POT) takes the cake. The company is sporting a market cap of $50.2 billion with a healthy average daily volume well above eight million. Potash is based in Saskatchewan and is the world’s largest potash producer, along with the third largest producer of nitrogen and phosphate (which are three key elements in fertilizers). Overall, PotashCorp is the world’s largest fertilizer producer and supplies roughly 20% of the globe’s potash.
Looking into POT as a stock, it seems relatively healthy, with great quarterly growth and a reasonable P/E of 21.36. The company has a current ratio of 0.94 and a debt/equity ratio of 0.61. One thing that may be of concern to investors is the total debt compared to cash on hand; POT currently holds $4.8 billion in debt with just $408 million in cash.
Aluminum is an extremely popular metal with a wide range of industrial uses, also making it one of the most practical commodity investments. Alcoa (AA) is not only famous for kicking off earnings season every quarter, but also for being among the largest aluminum producers in the world. Stationed in Pittsburgh, Alcoa leads the globe in the production of primary aluminum and fabricated aluminum, as its products are used in everything from aircraft to automobiles. AA operates in 31 countries and has a strong market cap of $13 billion, ranking them as one of the biggest aluminum producing firms in existence.
AA is an extremely popular stock, changing hands over 24 million times each day while paying out a decent dividend of 1%. Investors should note that this fund comes with an extremely high beta of 2.09 and also that about 60% of Alcoa’s shares are held by institutions rather than individuals.
Copper is another major industrial metal that is often used for plumbing and wiring. When it comes to copper production and mining, few companies have the clout that Freeport McMoran (FCX) has amassed. The company is one of the lowest-cost copper producers around the world as well as one of the biggest. About 75% of their revenues are derived from copper-related activities while the remaining 25% comes from gold and molybdenum, so it is not a pure-play on copper. Headquartered in Phoenix, Freeport is the largest publicly traded copper producer in the world.
FCX rakes in a market cap of nearly $44 billion while changing hands an average of 18.4 million times per day. FCX’s quarterly earnings growth is through the roof, while their low debt levels (debt/equity ratio of just 0.24) make for an interesting play. Investors should take note that around 78% of shares are held by institutions.
Gold has become an investor favorite as its price has shot through the roof in recent years, propelling it to new highs on what seems like a weekly basis. When it comes to gold mining, no one can match the size of Barrick Gold Corporation (ABX), a firm that has a current market cap of $50.7 billion and an ADV of 8.7 million shares. As the largest gold miner in the world, Barrick is well known for its robust operations that span to a number of countries across the globe. While gold is the main component of ABX, it is important to note that copper-related activities account for almost 20% of the company’s total revenues.
ABX has a beta of 0.63, a relatively low score for a mining company. Looking closer at in-depth financials for the company, ABX has strong earnings and revenue growth on a quarterly basis while its P/E ratio is below 13, suggesting that it is still reasonably valued given its growing revenue prospects. Also, investors may want to look at the physically-backed SPDR Gold Trust (GLD), which has a market cap of $66.1 billion, as another choice for those seeking exposure to the yellow metal.
Timber/lumber is a necessary commodity for construction as well as a number of other purposes, though its heavy use has been met with environmental backlash in more recent years. Plum Creek Timber (PCL) is an investor favorite for gaining access to this sector. PCL has a market cap of $6.1 billion and roughly 1.5 million shares trade each day, suggesting ample volume for most traders. The company is the largest private landowner in the U.S., the majority of which, is timberland, giving a strong outlook for this big-time player in the lumber space.
PCL pays out a healthy dividend yield of 4.6%, giving investors nice gains to go along with the commodity exposure. For the most part, this stock looks to be solid except for two glaring issues. First, debt levels of $2.7 billion in comparison to cash reserves of just $253 million are a bit alarming, especially given disturbingly high debt/equity ratio of 2.02. And second, about 9.5% of total shares are held as short positions, which may point to a lack of confidence from the general public or institutions (being that the stock is about 67% institutionally-owned).
Master limited partnerships have been immensely popular due to their high yields that boost bottom line returns in any portfolio. Though there are a number of viable options available, Kinder Morgan (KMP) is one of the biggest and best in the industry. Kinder is one of the leading pipeline operators in North America as it operates approximately 26,000 miles of pipeline. To give you a reference point, Kinder Morgan’s total pipelines could stretch around the entire equator with roughly 1,000 miles left over for other projects. The company has a market cap of $22.9 billion and changes hands over one million times each day.
KMP has a strong dividend of 6.8%, staying true to its MLP structure. The company has a P/E ratio of 120.49 but has been struggling with some of its quarterly earnings. Also, consider the enormously high payout ratio of over 770%, suggesting that the high dividends will not be sustainable over the long-term.
While metals can be broken down into a laundry list of types, as far as the overall industry is concerned, BHP Billiton (BHP) is by far the largest. With a market cap of $229 billion, BHP is not only the biggest metals conglomerate, but is also one of the biggest companies in the world. BHP is the world’s largest miner by revenue and the world’s third largest by market capitalization. The company is headquartered in Melbourne though it also has a major office in London.
BHP pays out a current dividend of 2.2% and has a current EPS of $8.54. The underlying statistics of the stock reveal a healthy quarterly growth, good debt management, and a sustainable payout ratio, making for an attractive investment opportunity.
Crude oil is another commodity that offers endless ways to make a play. This sector, however, focuses on companies that physically extract crude as well as explore new territories for other crude deposits. The Brazilian firm, Petrobras (PBR) takes the top spot in this category, with a current market cap of $186.8 billion and over 15 million shares traded every day. PBR is the largest company in Southern Hemisphere by both revenue and market cap, as it puts out roughly 2 million barrels of oil each day.
PBR has had a rough trailing year, losing almost 13% as oil has gone on quite a wild ride. Investors should also be aware that the Brazilian government has a major stake in PBR, which may affect its policies and how the company operates in general.
Silver, the other safe haven investment. This precious metal is used just about as often as gold to hedge against shaky equities and inflation, but also has a variety of industrial uses as well. Silver Wheaton (SLW) is one of the largest silver miners as well as the largest in silver streaming. A large portion of SLW’s business is routed through a Cayman Island-based subsidiary, avoiding income tax and boosting bottom line returns. The company has a current market cap of $14 billion and exchanges hands around 9.3 million times each day.
SLW has a great quarterly earnings growth and fantastic debt management, with a debt/equity ratio of just 0.14. The company has surged over 70% in the past year, something of a rarity as a number of precious metals miners have struggled as of late. SLW has a beta of 1.64, typical for a miner, and a P/E ratio of 28.42.
Steel is a mainstay industrial metal that is produced by using iron and coal. When it comes to steel production, ArcelorMittal (MT) reigns supreme. MT is the largest steel producing company in the world and ranked 99th on the Fortune Global 500 list of 2010. The firm has a market cap of $32.9 billion while remaining a popular trading instrument, as its average daily volume is around 5.7 million shares. The company is headquartered in Luxembourg and its operations span all around the world.
MT has a current P/E of 9.45 but is quite volatile when it comes to earnings as it is not uncommon to see this company deviate significantly from consensus analyst estimates. The stock does, however, pay out a strong dividend yield of 3.2%.
Disclosure: No positions at time of writing.