Commodity stocks are witnessing a meaningful pullback that has contrarian investors excited. Let’s take a look at two Canadian stocks that appear undervalued right now and could deliver huge gains in the coming months.
Crescent Point Energy
Crescent Point Energy (TSX:CPG)(NYSE:CPG) trades near $3.75 at the time of writing. That’s down from the 2021 high around $5.80, although still significantly above the 2020 low below $1 per share.
The company has been a disaster for investors over the past seven years, but the worst should be over for the stock. Crescent Point’s balance sheet is in decent shape and the company has started to make strategic acquisitions again. In the Q2 2021 earnings report, Crescent Point said it expects to generate excess cash flow of $675 million in 2021 with WTI oil averaging US$65 for the back half of the year.
West Texas Intermediate (WTI) oil just dipped below that amount to US$63 but has been comfortably above the target in July and the first half of August.
Management raised production guidance for the year while maintaining the outlook for capital expenditures. The company is making good money at current oil prices and net debt should continue to fall in the coming quarters.
Volatility should be expected, but oil bulls might want to start nibbling on the stock below $4 per share.
Teck Resources
Teck Resources (TSX:TECK.B)(NYSE:TECK) is a leading producer of metallurgical coal, copper, and zinc. As the global economic rebound kicks into gear and countries unleash trillions of dollars of infrastructure spending the demand for Teck’s core products is expected to grow.
Metallurgical coal is used to make steel. The steel market is already on fire with global producers ramping up output to meet the demand. China buys a lot of metallurgical coal and has increased purchases from Teck Resources this year. Steelmaking coal prices rallied in June and July and the market should remain strong through 2022.
Copper is a key component in the manufacturing of solar panels, wind turbines, and electric vehicles. These sectors are set to expand significantly over the next decade and copper supplies might not keep up due to the shortage of new mines under development. Copper prices have more than doubled off the 2020 low.
Teck Resources reported solid Q2 2021 results that indicate the impact of rising commodity prices. Each US$50 per tonne increase in the price of metallurgical coal adds about $900 million in annualized profit. A US$0.50 increase in the price of copper boosts profit by $200 million.
Revenues came in at $2.6 billion for the quarter compared to $1.7 billion in Q2 2020. Adjusted earnings per share rose to $0.63 compared to $0.17 in the same period last year.
Teck Resources finished Q2 with $6.1 billion in available liquidity and no significant debt is due before 2030.
The stock trades near $25.50 per share at the time of writing. That’s down from the 2021 closing high of around $31.50. It wouldn’t be a surprise to see Teck Resources take a run at $40 before the end of next year.
The bottom line
Crescent Point and Teck Resources can make big daily moves in either direction, so you need to have a strong stomach to own these stocks. However, the share prices are starting to look oversold and contrarian investors with a positive outlook on commodities might want to add these names to their portfolios for 2022.
