Concerns over the European debt crisis, slower economic growth in China and recently negative data from the United States, have resulted in a sharp stock market correction, and an even steeper drop in commodities like oil. It now looks like two outcomes are probable. One is a major recession or possible depression for some countries brought about by a continued downward spiral in Europe. This could lead to global contagion and deflate almost all asset prices.
The other possibility is that central banks will continue to do anything and everything to reflate the global economy and asset prices through stimulus and money printing. In spite of massive attempts by the U.S. Federal Reserve to pump up the economy, it remains weak. However, some top analysts believe that new policy announcements and a rebound from oversold levels, will eventually result in higher prices.
A recent Bloomberg article summarizes why analysts at Goldman Sachs expect commodities like gold, oil, copper, etc., to advance by 29%:
"Although the macroeconomic backdrop still remains uncertain, particularly in Europe, we believe that the sell-off in commodity prices is likely overdone and the price risks are shifting more to the upside," Currie wrote.
Since many stocks with commodity exposure have plunged, there could be major gains if the thesis proposed by Goldman Sachs plays out. Here are a few stocks to consider (that may or may not be endorsed by Goldman Sachs) for what could be oversized gains in the coming months:
ConocoPhillips (COP) shares are poised to benefit from a rebound in oil prices, especially since the company is now more of a pure play after it completed a spin off of the refining division. The stock recently dropped to about $51, but it has bounced off those levels and appears to have bottomed out. This stock is a good pick for more conservative investors because it has a solid balance sheet and it pays a dividend yield that will help support the share price in the event of serious market weakness.
ConocoPhillips has a consistent history of paying dividends and the payout has more than doubled from the 31 cents in 2005, to a quarterly dividend of 66 cents per share. Dividends are poised to keep rising in future because earnings estimates are more than double the dividend payout.
Here are some key points for COP:
Current share price: $54.10
The 52 week range is $50.62 to $80.13
Earnings estimates for 2012: $6.43 per share
Earnings estimates for 2013: $6.69 per share
Annual dividend: $2.64 per share which yields 4.9%
Newmont Mining Corporation (NEM) is one of the largest gold miners in the world, with operations in the United States, Australia, Peru, Canada, New Zealand, and other areas. This company is a top pick for many gold investors due to the size, balance sheet strength, and dividend it offers. Newmont has about $2.8 billion in cash and around $6.15 billion in debt, so the balance sheet gives the company flexibility to pursue increased exploration and production or acquisitions if the opportunity arises.
Newmont has been posting solid results with first quarter revenues of $2.7 billion, which is an increase of 9% from the prior year quarter. Net income from continuing operations was $561 million or $1.13 per share which compares favorably with earnings of $1.04 per share in the same quarter of last year. In addition to major gold production and reserves, Newmont is also producing copper which could be poised to benefit from a rally in commodities.
Here are some key points for NEM:
Current share price: $50.72
The 52 week range is $43.23 to $72.42
Earnings estimates for 2012: $4.64 per share
Earnings estimates for 2013: $5.31 per share
Annual dividend: $1.40 per share which yields 2.8%
Chevron Corporation (CVX) could be a solid way to play a resurgence in commodity prices like oil. Chevron shares have dipped with the markets and the price of oil, but that could be the buying opportunity so many of us were hoping to see. This stock could be close to the bottom, because it is already fundamentally undervalued at just 8 times earnings. Plus, the shares now yield 3.6%, and the dividend is likely to keep growing. Chevron has increased the dividend for 25 consecutive years.
This has made it a great stock for dividend growth. For example, in 2006, the quarterly dividend was 45 cents per share, but thanks to steady increases, the dividend has doubled in about 6 years to 90 cents per quarter. Chevron also has an excellent balance sheet with about $19.77 billion in cash and just around $9.28 billion in debt. A strong balance sheet is increasingly important in times of economic turmoil. It makes sense to accumulate Chevron shares now, especially on any market dips.
Here are some key points for CVX:
Current share price: $100.13
The 52 week range is $86.68 to $112.28
Earnings estimates for 2012: $13.14 per share
Earnings estimates for 2013: $13.17 per share
Annual dividend: $3.60 per share which yields 3.6%
Data is sourced from Yahoo Finance.
Disclosure: I am long CVX.