Commodities by nature are fickle investments. Trying to time when to buy commodities has been proven to cause hair loss. While I may not have the data to support that previous statement, I have analyzed a number of value plays for the commodity portion of my investment portfolio, and would like to share them. Let this be a starting guide to a world of fantastic value positions in the commodity sector, a sector which has been "beaten up" by Mr. Market, and which may provide significant portfolio gains given today's market uncertainty.
Let's start from the top:
My number one pick for a stock that will provide the best value to a value investor's commodity portfolio is Tourmaline Oil Corp (OTCPK:TRMLF). Tourmaline is an oil & gas revenue and earnings machine, posting positive earnings in both 2014 and 2015, two of the worst years in recent history for oil. Tourmaline's stable and growing revenues are complemented by durable cash flow generation and good corporate governance of liquidity (debt) policies. Tourmaline has a strong debt position relative to other large players in the industry, and is valued at close to its book value.
Second on the list is EOG Resources (NYSE:EOG). EOG boasts some of the most lucrative oil reserves in the commodity sector, and has been rumored to be looked at as a takeover target for some time due the quality of their properties. We like EOG as a value play for the long-term due to the fantastic asset portfolio EOG has built and the relatively high "break up value" the assets provide, regardless of a continued oil rebound.
Pioneer Natural Resources (NYSE:PXD) is next on the list. Pioneer's core asset base has been producing at an operating profit at sub-$40 oil, and is one of the most stable stocks due to its foundation of operational efficiency, strong balance sheet, and management's ability to make quality strategic long-term investments. Pioneer's debt position relative to its cash reserves position the company well to benefit from the recovery we are currently seeing in oil which is predicted to continue into 2017.
We also like Devon Energy (NYSE:DVN), one of the most "beat up" stocks in the oil sector, posting a 75% drop from its peak and trading at a price/book ratio of 0.82. Any time we can look at a stock that is trading at less than its break-up value, with the potential to "ride out the storm" and be profitable in a $50-$60 oil market, we get excited. We feel as though Devon Energy has made some key short-term moves to bolster their balance sheet to do so, and are keeping an eye on this value proposition.
Moving away from oil (sort of), we took a look at a well-integrated energy play, Canadian Utilities Ltd. (OTCPK:CDUAF). Canadian Utilities is our dividend play for the commodity portion of our portfolio, as this company has posted a consistent dividend around 4% and is has one of the safest dividends in the commodity sector due to its revenue guarantees from regulated utilities contracts and long-term commercial contracts which account for the lion's share of the company's revenue. This stock passes the "10 year test" of providing consistent and growing dividends, and is perfect for a safe, reliable dividend commodity position in your portfolio.
Last, but not least, we have a fan favorite: PotashCorp (POT). Potash is an industry which has been hit extremely hard, along with oil, but has very strong long-term macroeconomic fundamentals supporting LT growth, primarily stable and significant increases in global demand over time and an eventual stabilization of supply. PotashCorp is the biggest player globally in the potash industry, and currently carries a 5.5% dividend to go along with its capital appreciation potential.
This is by no means an exhaustive list, but is indeed a starting point for value investors to find a few "nuggets" in the heap. Keep searching my friends!
Disclosure: I am/we are long POT, DVN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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