04 May 3 Top Commodity Stocks for Investors
Commodities like gold, oil, iron ore, and copper are the foundation of our modern world. Technology and consumer goods may get most of the attention from stock investors, but none of the products in those sectors would be possible without basic materials. This indisputable fact makes commodity stocks Southern Copper, Freeport-McMoRan Inc, and Anadarko Petroleum top investment candidates.
Company Current Yield Primary Commodities Produced
Southern Copper (NYSE:SCCO) 0.87% Copper, zinc, and silver
Freeport-McMoRan Inc (NYSE:FCX) N/A Copper, gold, and oil
Anadarko Petroleum (NYSE:APC) 0.43% Oil, natural gas, natural gas liquids
DATA SOURCE: S&P GLOBAL MARKET INTELLIGENCE.
Read on to learn what else makes these particular commodity stocks great for investors seeking exposure to this vital market.
A mine at sunrise
IMAGE SOURCE: GETTY IMAGES.
A South American copper behemoth
Southern Copper Corporation is one of the largest integrated copper producers in the world. It produces not only copper but zinc, silver, and molybdenum as well. The company has been in the business a long time, having begun its copper mining operations in 1960. Shares are listed on the New York Stock Exchange, but practically all of the company’s mining, smelting, and refining facilities are found south of the border — in Peru and Mexico. The commodity company continues to conduct exploration activities in those countries, as well as in Argentina, Chile, and Ecuador. Its rich history and continued exploratory initiatives make Southern Copper owner of one of the largest copper reserves in the world today. As icing on the cake, and of critical importance to long-term investors, the company boasts the longest estimated “mine life” in the industry, at 59 years.
Recent results have been good, fueled by a steady rise in the price of copper over the last 12 months. The company reported revenue of $1.583 billion and profits of $314.4 million in the first quarter of 2017, a 27% increase and a 70% increase, respectively, over Q1 2016. Also of note: The company generated $244 million in free cash flow in Q1, which should help support its 0.9% dividend yield. With analysts polled by S&P Global Market Intelligence projecting normalized earnings in fiscal 2020 to reach $2.41 per share, a nice increase from fiscal 2017’s projected $1.68, Southern Copper is a solid commodity stock for investors looking for exposure to the sector.
A true commodity stock
Headquartered in Phoenix, Arizona, Freeport-McMoRan is a leading international mining conglomerate. Freeport-McMoRan’s revenue comes from a broad array of essential commodities, including copper (70% of fiscal 2016 revenue), gold (10%), oil (9%), and molybdenum (4%). The company’s segments are North America copper mines, South America mining, Indonesia mining, and molybdenum mines. As is the case with Southern Copper, Freeport’s management believes the underlying long-term fundamentals of the copper business remain stable. The company has retained a portfolio of high-quality, long-lived copper assets positioned to generate value for the long term. One cause for concern: The company’s Grasberg mine (located in Indonesia) has been the subject of some contention. Indonesia’s government wants control of the mine in two years — something that doesn’t fit well with Freeport’s plans due to Grasberg’s size and low cost of production. While the jury is still out, the issue may very resolve itself at the negotiation table by this fall, according to the latest news on this situation.
While Freeport-McMoRan’s stock is down 14% so far this year, the drop presents a unique buying opportunity for investors seeking commodity exposure. Should the company be able to tackle its $27 billion debt load (a decent prospect as the company has produced over $1.6 billion in free cash flow (FCF) over the 12 months ended 3/31/2017, despite a widely recognized industry malaise), the shares could prove to be a bargain at just 11 times S&P Global Market Intelligence’s fiscal 2017 forward EPS estimate of $1.02.
An oil and gas producer primed for a rebound
Anadarko Petroleum Corporation is among the world’s largest independent oil and gas exploration and production companies, with approximately 1.7 billion barrels of oil equivalent of proved reserves. Anadarko was formed in 1959 as a subsidiary of Panhandle Eastern Corporation Pipe Line Company after the discovery of large amounts of natural gas in the Anadarko Basin (hence the name), which underlies the Texas Panhandle and Oklahoma Panhandle, and stretches as far as Southwest Kansas. While Anadarko’s current reserve portfolio includes onshore assets in the continental U.S. and Alaska, the company also happens to be the largest independent producer in the deepwater Gulf of Mexico and major player internationally, with operations (primarily in the natural gas liquids subsector) in Algeria, Ghana, Mozambique, Colombia, and Cote d’Ivoire. However, don’t mistake Anadarko for an international oil stock: U.S. operations accounted for 89% of sales volumes and 80% of sales revenue during 2016 and made up 90% of its proved reserves at year-end.
Anadarko Petroleum continues to suffer alongside the rest of its oil industry peers, with shares down 33% year to date. However, casting a view to the long term, there is a strong reason to believe Anadarko is one of the best commodity stocks for investors to consider today. It is one of the lowest-cost shale producers in the U.S., continues to expand its empire, and management is bullish as evidenced by a recent uptick in insider buying by multiple members of its C-suite. Chief Executive Officer Al Walker and board director Peter Fluor each purchased more than $1 million of the company’s stock in May 2017.
While the company might appear expensive at 46 times S&P Global Market Intelligence forward EPS estimates, this earnings figure is depressed due to the less-than-ideal oil and gas market. Looking ahead, analysts polled by the financial information service expect earnings to nearly triple by fiscal 2021 (estimated EPS of $2.76). As one of the few oil producers that managed to be free-cash-flow positive over the past 12 months, Anadarko Petroleum is a sound commodity stock buy for those willing to dive into the oil and gas subsector.