Commodities have taken a beating, but shares in commodity-focused businesses have been hit even harder over the past two weeks. With oil still trading at $96 a barrel, I feel the selling is overdone in many of the majors; with gold holding near $1500, some of the mining shares look cheap as well. Here are six dirt cheap commodity plays to buy and hold onto until the POMO party is over and the music stops playing.
Conoco (NYSE:COP) has become reasonable again. I took profits late last year and was kicking myself about it until now. The stock is trading for just 8.6X earnings and 8X forward estimates with a 3.7% yield and an EV/EBITDA of only 4.7X. COP exhibits strong YOY growth in revenues (27%) and strong YOY earnings growth (44%) with an 18% return on equity. RSI on the one month chart is around 20, suggesting the stock is heavily oversold and could bounce quite soon -- shares are around $10 below their 52-week highs. Stochastic are even more oversold on COP.
Chevron (NYSE:CVX) is trading for 9.72X trailing earnings but only 7.7X forward earnings with a dividend yield of 3%, an EV/EBITDA of only 4.8X, and an ROE over 20%. CVX's net margins are quite strong at 10% and revenue growth of 25%, along with earnings growth of 36%, is quite robust, but is obviously due in large part to the rise in oil prices. Like COP, CVX is quite oversold at around 25 on its RSI and a 20 Stochastic. Any uptick in oil futures should send this stock markedly higher, and shorter term traders can use the $100 level as a hard stop loss price or a mental stop.
Statoil (STO) is another cheap name in the space which has sold off substantially with the U.S. dollar short-covering rally in recent weeks and the sell-off in oil futures due in part to increases in margin requirements and a supply surplus. While speculation can be blamed for higher oil, QE2 is likely a more logical source of causality for higher commodity prices than market participants placing long bets. Over time, it seems that oil prices will likely continue to rise due to supply and demand factors. STO trades for 7.7X forward earnings and an EV/EBITDA ratio of 4.5X. The stock is oversold with an RSI of around 28 on the one-year chart. From an "owner earnings" perspective (net income plus depreciation minus capex), STO appears to be an incredible bargain at current levels and the best deal on this list, in my view -- although its reserves should be studied at length before taking a concentrated position in the stock.
Total (NYSE:TOT), a French oil and gas company, is a stock I have watched for some time now and have had some success with from a covered call standpoint. TOT is cheap at 7.8X earnings and 7X forward earnings. The stock pays a 4.6% dividend, and TOT trades for an EV/EBITDA of only 3.38X. TOT is oversold with an RSI of around 30. I would consider buying the stock for a trade, and instead of taking profits, sell a $60 July call option against your stock for income and a hedge.
Marathon (NYSE:MRO) is another cheap oil and gas name with large depreciation, which leads to understated earnings, in my opinion. The stock is trading for 11.47X earnings, 8X forward earnings, and for 4.15X EV/EBITDA. Marathon is cheap but shares have rallied substantially over the past year and are not as technically oversold as the other stocks on this list. That said, investors can use the $50 mark for a stop loss order.
Hess (NYSE:HES) is a fairly cheap name currently, trading for only 9.95X trailing earnings and 9.25X forward earnings. The stock is trading for just 4.3X EV/EBITDA with no material dividend and a 40% premium to book value. Option investors could buy a June $70 call option and sell a June $80 call after a 5% or so rally in the common stock. Oil is below resistance at $100 a barrel; however, these stocks are undervalued with $85 or higher oil prices. Short term traders should make sure to sell before POMO days which contain 1.5BN of monetization and not the 6-7BN POMO injections which tend to send the market up at around 11 am-2pm scheduled lift off times.