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Tuesday October 02, 2012
Six ways to trade commodities
by Mike Cintolo, editor Cabot Market Letter  Both the European Central Bank and the U.S. Fed announced open-ended bond-buying programs; it’s unprecedented! The market as a whole has reacted well to that news, and is concluding that inflation will be the order of the day. We’re not talking about consumer inflation, but the price of core commodities—gold, oil, copper and the like. We’re not interested in the commodities themselves, but in the stocks that will benefit from higher prices. And on that front, what’s most encouraging is that many commodity-related stocks have etched multi-month (in some cases multi-year) consolidations, and the push higher this month has many names attacking their highs. There are many enticing options in the space. If you want to keep it simple, you could simply buy a broad fund like the SPDR Metals & Mining Fund (XME), which tracks a collection of gold, steel and coal stocks, or the SPDR Basic Materials Sector Fund (XLB), which is more concentrated and owns some larger, more stable firms. The XME could barely get off its knees during the early-year rally, but just popped above its40-week moving average for the fi rst time in more than a year. The XLB is less volatile and much stronger, breaking out of a 30-week base two weeks ago, and is now approaching its 2011 highs of 40. As for individual stocks, we like the look of many drillers, including Seadrill (SDRL), which is the main way to play the explosive demand for deepwater drilling rigs. Dayrates for these rigs have shot above $600,000, and this company has many new-order rigs that are set to be delivered in the quarters to come. As an added bonus, the firm pays out most of its cash flow in dividends, resulting in a yield north of 8%. Another play on deepwater drilling is Cameron (CAM), an old favorite that we rode to solid gains back in 2007. The firm is a leader in sub-sea trees, which are needed to control the pressure and direct the flow of oil and gas out of a well. It’s also doing a big business in blowout preventers, which oil firms are clamoring for since BP’s disaster two years ago. The stock is approaching all-time highs, and earnings growth is set to accelerate (up 21% this year, up 35% in 2013) in the quarters ahead. Outside the oil space, we’re watching Agrium (AGU), a big fertilizer firm that is benefiting from high crop prices; earnings are expected to come in at a whopping $10 per share this year and remain that high in 2013, and the company is beginning to use some of that cash to repurchase shares. In precious metals, Silver Wheaton (SLW) is another old favorite of ours, a unique company that doesn’t actually mine anything, but purchases stakes in other firms’ mines, giving it exposure to nearly 30 million ounces of production per year. The stock has come roaring back after a year-long correction. All in all, we’ll never be big holders of commodity stocks, but they can prove fruitful for stretches, and it looks like many of them have upside following the pump-priming announcements by the central banks. Learn more about this financial newsletter at Mike Cintolo's Cabot Market Letter. Related articles: 
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