Commodity stocks have had one heck of a run over the past year. From oil to precious metals, wheat to potash, the year behind us has been the year to get into the commodities trade. With all the strength and momentum behind the broader basket of commodities, the question that investors must ask themselves is if the commodity rally has more room to the upside or if a steep pullback could be in the cards.
Now, various commodities have recently shown signs of cooling. Whether or not lower lows are ahead is a mystery. In any case, it’s hard to imagine a scenario where commodities like oil can rise any higher than where they are right now (sitting at US$100 per barrel of WTI). Indeed, many disciplined value investors who missed the run may be content to just sit and wait for the next sell-off, which may yield a better entry point.
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Commodity stocks to buy on the way up?
Still, I’m a bigger fan of buying commodity stocks on the back of strength in the underlying commodity price, rather than buying on the way down. Waning demand can get value chasers caught offside by catching the falling knife commodity plays. Though near-term shocks like the coronavirus-driven one that sent oil negative may be worth getting behind as a true contrarian investor!
In this piece, we’ll check out three Canadian commodity stocks that I think still have room to the upside. Despite their recent momentum, I believe they’re priced in such a manner that bakes in a near-term cooling off in commodity prices.
Further, they’re well-run firms in better-than-average shape to ride out any turbulence in the commodity scene. Oil, wheat, gold, potash, and silver can be volatile and they can be tough to own for near-term traders. That said, for long-term investors looking for greater diversification, I do think commodities are a great place to look.
Barrick Gold
Barrick Gold (TSX: ABX)(NYSE: GOLD) is my preferred way to bet on the precious metals miners and it’s not a mystery as to why. It’s incredibly efficient, with some of the more cost-effective operations out there.
With the recent rise in gold prices, it’s hard to pass up on the name, especially given its dividend, which can exceed the 2% level during the steepest of dips. Pending a vicious gold implosion, I view the dividend as durable. While a gold crash is possible, I do think that given all the macro headwinds that it’s hard to see gold crumbling so violently.
Even if gold were to fall below US$1,650 per ounce, Barrick is in great shape. With terrific management and a modest price of admission, Barrick could be one of the cheaper commodity plays to buy here, even as gold looks to add to its gains, with sights set on that US$2,000 per ounce level.
Nutrien
Nutrien (TSX: NTR)(NYSE: NTR) has been a freight train of momentum over the past two years. Shares recently went parabolic on the back of Russia’s invasion of Ukraine. Amid Russian sanctions, a big chunk of potash production is poised to go offline. For potash kingpin Nutrien, the increase in prices will act as a huge windfall.
Now up over 223% from its 2020 bottom, Nutrien stock seems like one of those commodity stocks to buy on the way up. It’s been a long time coming for the perennial underperformer. With a mere 18.8 times earnings multiple and a 1.85% yield, Nutrien stock looks ripe for buying on the way up. Like Barrick, Nutrien is a best-in-breed miner, with some of the lowest costs of potash production out there.
