Tickers in this Article: DBC, OII, RIO, ACI
With the Dow Jones AIG Commodity Index down 16% in the last month, commodity-related stocks have been hit even harder. Instead of running for cover, I feel there is opportunity for investors willing to take some risk in quality investments.

Think Long-Term
The long-term outlook for commodity prices remains bullish as demand from emerging countries such as China will remain strong. Talk of China's growth slowing is true, yet it does not paint an accurate picture. Granted gross domestic product (GDP) did drop slightly from last year, but for the first half of 2008, China's GDP grew by 10.4%. This growth in China and other emerging markets requires large quantities of commodities and simple economics proves that as demand increases and supply remains constant, prices will rise.

The selloff that has occurred in the commodity sector is not the ideal pullback for an entry point; however, many commodity stocks are now sitting on long-term support and offer high reward-to-risk opportunities. The key to picking commodity stocks in this type of environment is a combination of fundamental and technical analysis. Below is a diverse list of commodity stocks and one exchange traded fund (ETF) that have been beaten down but that could also be an opportunity for long-term commodity investors. (To learn how to invest by using both charts and reports, check out Blending Technical And Fundamental Analysis.)

Three Stocks and an ETF
Arch Coal (NYSE:ACI) - The company is the country's second largest coal producer, and it pumps out approximately 130 million tons of coal per year. The stock has fallen from a high of $77 in June to a low of $45 in early August. Falling 40% would scare most investors away, but the stock is sitting on technical support at the $45 area and the fundamentals have now become attractive. The forward PEG ratio is 0.45 while the industry average of 1.10. Considering about half of the electricity in the U.S. comes from coal and we can get it out of the ground here in the U.S., the future remains bright.

Oceaneering International (NYSE:OII) - It is surprising that the talk of possibly opening up more waters off the coast of the U.S. to oil drilling has not helped drillers such as Oceaneering International. But, the stock and entire subsector has been falling with the price of oil. After closing above $82 in mid-June the stock has fallen as low as $55 in August. While this play is based on its business, providing offshore drilling and construction, the No.1 reason it made the list was the chart. After pulling back to the $55 area in February and March, the stock was able to rally, creating a support line. Buying as close to $55 as possible gives investors little risk with a possible stop-loss just below support. (To learn more, check out Support And Resistance Basics.)

Companhia Vale do Rio Doce (NYSE:RIO) - One of the largest miners in the world, Vale, recently reported second quarter record net profit, which included an increase of 22% over last year. The world's largest producer of iron ore stated that demand for its commodities remained strong even in the face of the U.S. credit crunch. Technically speaking, the stock is sitting at important support at the $25 area. Not only was this once resistance in 2007, but it was also support in January 2008. Similar to Oceaneering International, Vale offers a high reward-to-risk setup at the current price.

PowerShares DB Commodity Tracking ETF (AMEX:DBC) - For the investor that would rather play the actual commodity futures in lieu of the related companies, there is DBC. The ETF invests in six commodity futures, with crude taking up the largest allocation at 37%. It is followed by heating oil (23%), corn (11%), aluminum (11%), wheat (10%) and gold (8%). As you can see the ETF is heavily weighted toward the energy futures, but it does have exposure to a variety of sectors. Support for DBC is at the 200-day moving average of $36.50. (For more on this metric, see Moving Average Explosions.)

Downside Protection
All four of the investments above have one thing in common - they are sitting at or near support levels. When buying close to support it gives the investor the ability to take a small loss if the investment goes against them. In this case, if support is broken, the best scenario would be to sell and take a small loss and move on to the next possible winner.

comments powered by Disqus

Trading Center