Don’t look now, but commodities are finally making a big comeback.
If you peruse the Lifetime Wealth Generators and Undiscovered High-Yielders portfolios in my High-Yield Investing premium newsletter, you won’t find a single stock tied directly to the production of energy or metals. There are several midstream partnerships that transport the stuff, but none that actually dig it out of the ground.
[ad#Google Adsense 336×280-IA]That underweighting has served us well, as commodities have been stuck in a multi-year swoon.
Everyone knows that oil plunged from $100 to around $25 per barrel.
And gold bugs were dismayed last November when the metal sunk to a 6-year low of $1,070 per ounce, about half its former highs above $1,900.
Copper, platinum, coal, iron ore and many other resources have all been in the same leaky boat.
Just look at the PowerShares DB Commodity Tracking ETF (NYSE: DBC), which reflects the prices of everything from gasoline to zinc to sugar.
From the beginning of 2014 through the end of 2015, the fund lost half its value, sliding from $25.08 to $13.36. Along the way, investors yanked out more than $1 billion in assets.
But this cyclical group is making a strong recovery in 2016. In fact, commodities are the best performing asset class this year, outrunning stocks, bonds, real estate and just about everything else. The value of the portfolio in StreetAuthority’s natural resource advisory, Scarcity & Real Wealth, has risen 28% year to date, nearly four times the pace of the broader market.
Oil has led the charge, with benchmark West Texas Intermediate (WTI) prices doubling off their February lows. After an extended losing streak, gold has rallied 25% and is back above $1,300 per ounce. Platinum and silver aren’t far behind. Industrial metals are on the move as well. Copper has risen sharply from 7-year lows set back in January.
Bloomberg tracks a custom index of 22 major commodity groups, 15 of which are in the black this year. Agricultural commodities like soybeans and cotton have been among the biggest gainers. In turn, that will likely mean greater demand for tractors, irrigation equipment and other such farm essentials.
In time, we will explore some of the underlying reasons, such as expanding imports into China and a more robust outlook for global manufacturing and construction. For now, I just wanted to put this long overlooked sector (along with related equipment vendors and service providers) back on your radar.
These can be capital-intensive businesses, so commodities producers aren’t always known for their dividends. But many maintain generous payouts well above the market average. In the table below, you’ll find a few names to consider.
Action To Take: This stock screen is meant to uncover a group of candidates that might be worthy of a closer look. While the stocks in the table above meet certain requirements, they have not been fully researched and shouldn’t necessarily be considered recommendations.
False rallies and head-fakes are common among commodities, which can be highly volatile and difficult to predict. So I wouldn’t view this uptick as an unmistakable buy signal. However, the fundamentals are looking better than they did six to 12 months ago. And if the global economy continues to heat up, then this could be the beginning of a sustained rally.
If you’re uncomfortable with the dynamics of these individual markets, then you might want to consider a fund like Blackrock Resources & Commodities Strategy Trust (NYSE: BCX) — whose portfolio is professionally managed and spread judiciously among the entire commodity spectrum.
It also offers monthly distributions.
The $937 million fund provides exposure to heavy-hitters such as Barrick Gold (NYSE: ABX), Rio Tinto (NYSE: RIO), and International Paper (NYSE: IP), all reliable producers with proven assets. Agriculture, metals and energy each represent about one-third of the portfolio. About half of the fund’s assets are invested in the U.S., with the other half deployed internationally.
While many of the holdings maintain sizeable dividends, the portfolio managers also write call options to generate additional income. As a result, BCX currently boasts a distribution yield of 6.6%. Better still, it’s currently trading at just $7.91 — a wide discount to the net asset value (NAV) of $9.30 per share.
Of course, the shares have been at a discount for the past three years given that this group has been out of favor. But we could be seeing the beginning of a change in sentiment. For long-term investors who can withstand day-to-day volatility, this portfolio represents an ownership stake in most of the world’s most vital (and dwindling) resources.
— Nathan Slaughter
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Source: Street Authority