Are you looking for commodity stocks to invest a small sum – perhaps $1,400 – in? If so, the Toronto Stock Exchange (TSX) provides you with plenty of options to work with. Canada’s economy is heavily resource based, having plenty of metals, oil, gas, and lumber companies. The biggest of them are usually publicly traded. The world consumes increasing amounts of resources with each passing year, and Canada has far more than it needs for its own purposes. So, TSX commodity stocks collectively have promise. In this article, I will explore one TSX commodity stock that is worth a buy today.
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Suncor Energy
Suncor Energy Inc (TSX:SU) is a Canadian energy company that is primarily involved in extracting, selling and refining crude oil. The diversified energy firm sells its own refined products at a network of gas stations called Petro-Canada. It is one of the biggest and most entrenched Canadian energy companies.
A stable commodity
When it comes to commodities, oil and gas are among the most reliable out there. With countless industry use cases (e.g., fuel, chemicals, asphalt etc.), oil has a steady source of demand outside of speculative activity. This makes it a generally more predictable market than that for other commodities whose speculative use cases make up a greater percentage of trading volume.
There is some concern about oil someday becoming irrelevant and obsolete. These concerns are overblown for three reasons:
- The energy sources that will supposedly replace oil, such as nuclear and renewables, take a very long time to build out. This effectively removes such alternatives as a “medium term” threat–though they’ll likely negative impact demand over the very long term.
- Oil will probably always have some role as a backup fuel source (e.g., in generators) because renewables generally don’t work unless the user has access to a working electric grid.
- Oil is the best known starting material for chemicals production and thus indispensable to industries like plastics and pharmaceuticals.
While we will likely see some of oil’s energy use replaced over the very long term, the commodity will probably always be used to some extent or another. This fact bodes well for Suncor’s future prospects.
Increasing diversification
In addition to selling a very valuable and indispensable commodity, Suncor operates other diversified business lines. These include refining, natural gas marketing, and gas stations. So, Suncor has some ability to remain profitable even in moderately weak oil markets.
High margins
Suncor’s profitability can be seen in its margins. In the trailing 12-month (TTM) period, it had a 59% gross margin, an 18% EBIT (operating income) margin, a 12% net margin, and a 16% free cash flow (FCF) margin. These are fairly high margins, suggesting that Suncor is a solidly profitable enterprise.
A cheap valuation
Last but not least, Suncor Energy boasts a very cheap valuation. At today’s prices, it trades at 9.4 times earnings, 1.3 times sales, and 1.4 times book. These multiples are low in the absolute sense, and also lower than those of the broader TSX. So, SU stock looks like a good value.
