Commodities are not traditionally stocks or bonds. They are items that businesses and investors buy and sell on forward-looking contracts known as futures. If you do it correctly, you can make a lot of money.
However, rash trading and unexpected market movements might leave someone owing more than they have in their bank account.
Fortunately, investing in commodity stocks does not need you to break out in a cold sweat. There are stocks and exchange-traded funds (ETFs) that provide exposure without the risk of futures.
There are now some possible upsides in 2023.
“Most commodities markets are tighter than many people believe right now,” says Vineyard Global Advisors’ chief investment officer, Thomas Samuelson. “As China’s economy improves in 2023 owing to the end of the Covid lockdowns in late-2022, its rising spending will put the attention back on commodity markets. Despite the recent economic slump, stockpiles of several important commodities have decreased and are currently at critically low levels.“
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Here are a few that experts thought were particularly enticing.
Albemarle County (ALB)
While lithium has long been employed in the treatment of some psychological illnesses, it is now better known to most people as a key component in lithium-ion batteries.
This makes it vital for a variety of businesses, including mobile gadgets, defense, electronic vehicles, and anything else that relies on portable electrical power.
To demonstrate its important role in manufacturing, General Motors (GM) stated in late January 2023 that it would invest $650 million in a mining business to create U.S. sources of the metal.
When it comes to lithium, though, numerous experts, including Daniel Milan, managing partner and investment adviser representative at Cornerstone Financial Services, favor Albemarle.
While it is not a pure play commodity stock, it does have a significant mining business as a chemicals manufacturer, according to Milan. “The commodity lithium is particularly appealing to ALB. Since 2020, ALB has been the main supplier of lithium for electric vehicle batteries.“
Albemarle has also been a solid stock performer, according to Milan, in addition to being in the right place at the right time. “[It] has had consistent, growing dividend growth for the past 28 years, and the rapid expansion of electric vehicles will only support that growth in an extremely robust fashion going forward,” he says.
“The company is situated in the U.S. but has major lithium mining properties in Chile and Australia, which are incredibly valuable for future growth both from a dividend and EPS standpoint. This is represented in a projected price-to-earnings (P/E) ratio of under 10x, compared to their current P/E of approximately 21.4x.“
VanEck Vectors Rare Earth/Strategic Metals ETF (REMX)
Rob Isbitts, the founder of Sungarden Investment Publishing and a former experienced wealth advisor and mutual fund manager, isn’t bullish on commodities overall in 2023 due to potential headwinds, but he does believe that REMX, an ETF that invests in a set of companies in the so-called rare-earth metals—a set of minerals critical to many industries—is a good choice.
“Strategic metals are utilized in the manufacture of jet engines, hybrid automobiles, steel alloys, wind turbines, flat-screen televisions, and cellular phones,” Isbitts explains. “Rare earth metals, a subset of strategic metals, are a group of 17 chemical elements that are required in many of today’s most modern technologies, particularly electronics.” He claims that the chemicals are frequently discovered as byproducts of mining for other minerals such as manganese, titanium, and tungsten.
“REMX appears to me to represent a niche part of the metals market that investors are less familiar with than gold and silver, which both appear to be struggling to add significant gains this year,” Isbitts says.
According to S&P Global Market Intelligence, almost half of the ETF’s corporate holdings are in Asia, with almost 21% in the U.S. The remaining is split between Latin America/the Caribbean and Africa/Middle East. The price was in the mid $30s just before the pandemic.
Allegheny Tech (ATI)
People frequently concentrate on precious metals such as silver and gold, as well as rare earth metals. “However, base metals such as nickel and aluminum have been flying under the radar,” says Patrick France, a senior teacher at VectorVest, a vendor of market prediction and forecasting software. “They’ve been rebounding off their lows for the previous three months, but no one is talking about these hot commodities.“
That’s why France admires Allegheny Tech. “They make and market specialist components and materials made from base metals like nickel, cobalt, and titanium,” he explains.
“ATI has been surpassing predictions and is likely to continue to beat profit forecasts for at least the next 12 months, and as the old saying goes, money flows where money increases. ATI’s primary customers are in the energy, aerospace and defense, automotive, and electronic markets, which stand to benefit tremendously in the near future from possible and current legislation such as the CHIPS Act and the Build Back Better Act. With America’s energy infrastructure in serious need of modernization, ATI could emerge as a clear winner in the coming year and beyond.“
Freeport-McMoRan Inc. (FCX)
Then there’s copper, one of the industrial metal’s kings. “FCX is a leading copper producer with 107.2 billion pounds of copper reserves,” says Thomas Samuelson.
However, the company’s investment provides exposure to both the copper and energy sectors.
“Copper is an important metal in electric vehicles and renewable energy,” he continues. “As EVs become more widespread, massive amounts of copper will be needed.
“A conventional gas-powered automobile has 18-49 pounds of copper, whereas a battery-powered EV has 183 pounds. A fully electrified bus necessitates 814 pounds of copper.“
Copper is also used in renewable energy such as windmills and solar panels, as well as electrical infrastructure. “By the end of the decade, global copper demand for alternative energy sources is predicted to quadruple to 9.5 billion pounds. “Global copper consumption (for all purposes) is predicted to climb 30% year on year in 2023,” he added.
Steel Dynamics (STLD)
If copper is the electrical bloodstream of industry, steel is the bones. “Steel is a backbone of the economy, even though it seems old-fashioned,” says David Russell, a market strategist with online brokerage TradeStation. “It’s hard to produce anything or deliver services without somehow stimulating demand for this important industrial metal.
Steelmakers were mostly written off after the mortgage crisis and commodity collapse a decade ago, but money returned to them when the epidemic increased the demand for goods. Steel mills are increasing output after some pain from the Fed, and investors are taking notice.“
Russell mentions Steel Dynamics. “STLD was added to the S&P 500 in December 2022,” making it a large corporation.
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