3 Top Stocks for Commodity Exposure

Top stocks like Teck Resources have been hit lately, but most commodity markets remain strong and ready for the next leg up.

Oil pipes in an oil field

Image source: Getty Images.

After a stellar couple of years, most commodity stocks have taken a hit this year. This is not totally surprising – inflation and recession risks have really thrown a wrench into the commodities investing thesis.

But I think that there’s also been a general sense that the upside in these stocks has really run its course – for now at least. After all, the commodities business is infamously cyclical. Booming periods are inevitably following by downturns. That’s just the way it goes in the world of commodities, where supply/demand fundamentals rule the day – and the pricing.

On that note, here are three top Canadian stocks that have been hit this year after highly impressive runs. They’ve all taken a breather, but the upcycle is not over. In my opinion, significant upside still exists.

Enerplus stock: Up almost 900% from 2020 lows

The first commodity stock I’d like to discuss is Enerplus Corp. (TSX:ERF)(NYSE:ERF). It’s a little-known energy stock that doesn’t get much attention. But it’s also a high quality stock that benefits from its significant exposure to some of the most prolific unconventional oil and gas resource plays in the U.S. The independent oil and gas producer also benefits from its top operational and financial discipline. For example, Enerplus was acquiring businesses when the energy industry was at cyclical lows. This means they acquired on the cheap, generating tons of value.

Top stocks to buy right now

So, it comes as no surprise to me that Enerplus stock has been one of the best performers in the last few years – it’s up an impressive 900% since its 2020 lows. While Enerplus stock has been hit in the last few months, its business is still going strong. So strong that it may actually be one of the top stocks to buy right now. Oil has been weaker lately, but it’s still 31% higher than one year ago and double what it was two years ago.

In Q2 2022, net income increased 4.8-fold to $244.4 million over the year-ago quarter, boosted by strong adjusted funds flow, which doubled to $297.4 million. As a result, the company plans to reward shareholders by allocating at least 60% of free cash flow to dividends and share repurchases in both 2022 and 2023.

Freehold Royalties is yielding 7.8%

The next commodity stock on my list is Freehold Royalties Ltd. (TSX:FRU). This Canadian energy trust is a relatively safe way to gain access to the energy sector. This is because it’s a royalty. What this means is that there’s less risk involved. Freehold collects royalties from other companies who are actually taking on the exploration and production risks.

Top Canadian stocks

Yet, Freehold stock has also been hit lately – it’s down 17% since June 2022. After enjoying a 400% increase since its 2020 lows, sliding oil prices took their toll. But like Enerplus, Freehold’s actual business is firing on all cylinders. Soaring cash flow, falling debt levels, and rising dividends have dominated Freehold’s results recently. Importantly, at the current oil price of almost $90, we can expect this run to continue.

In short, the world still needs oil and gas. As a Canadian royalty company that gets royalties off of Canadian oil and gas assets, Freehold offers smart exposure. Plus, its 7.8% yield makes it one of the top dividend stocks in Canada to buy right now.

Teck Resources stock: Down but not out

Teck Resources Ltd. (TSX:TECK.B)(NYSE:TECK) has had an especially rough 2022 – the stock is down 26% from its April highs. But, it’s up a remarkable 345% from its 2020 lows.

Top stocks

This is a $23 billion diversified mining, smelting and refining giant. It has operations in Canada, the U.S., Chile and Peru. The company has major positions in different base metals markets and a 20% interest in the Fort Hills oil sands mine.

While Teck is a commodity stock, it also has its foot in the renewable energy industry. Going forward, its coal production as a percent of total production will fall (which is good). At the same time, its copper production is rising dramatically (also good). The company’s reliance on coal will fall. In its place, we’ll see copper production doubling by 2023.

This focus on copper is a good strategic move for Teck, as copper is used extensively in the renewable energy industry. For example, electric vehicles require three times more copper than conventional vehicles. This means that there’s a solid secular growth profile for copper. In short, the trend towards renewables is accelerating rapidly, so copper will likely see strong demand for years to come.

Teck appears to be smoothly making the transition to higher growth markets. The company recently reported net income for the twelve months ending June 30, 2022 of $4.388B, a 2869.51% increase year over year, on a revenue jump of $4.532B, a 117.59% increase over the same period.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any of the stocks mentioned. The Motley Fool recommends FREEHOLD ROYALTIES LTD.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »