Tickers in this Article: OMG, VALE, FCX, ABX, GB, JCI, RTN
The first week of May has not been a good one for speculators on the long side of many metals trades. Silver took a significant plunge, gold sold off and copper cracked the $4 level. Not too surprisingly, then, it was a rough week for major metal commodity stocks like Vale (Nasdaq:VALE), Freeport-McMoRan (NYSE:FCX) or Barrick Gold (NYSE:ABX).

TUTORIAL: Commodity Investing 101

Investors who want to play commodities from a more strategic, and generally less volatile, angle may want to consider OM Group (NYSE:OMG). While OM Group is not a pure commodity company in the sense that it sells raw metal, the company does offer a way to play the demand for cobalt through its cobalt-based specialty products businesses. Better still, it seems too cheap.

A Great Quarter That Most Won't Notice
OM Group has precious little institutional coverage, so it's not exactly front page news when the company reports earnings. Moreover, 9% revenue growth probably does not seem all that exciting, even if it is well ahead of even the highest published revenue estimate. Top line growth was certainly boosted by the inclusion of a full quarter of the battery business; the pre-existing and fully comparable advanced materials and specialty chemicals businesses posted growth of 6% and 5% respectively on modest volume growth.

Profitability was a fair bit better. While the battery business has below-average profitability at present, OM Group nevertheless saw more than a point of gross margin expansion and a nearly 19% increase in operating income. (For more, see Zooming In On Operating Income.)

Strong Demand Across Several Markets
Most people never give much thought to cobalt, but it is useful (if not critical) in several large markets. Cobalt finds its way into a variety of ceramics and metal blends, where it adds hardness and durability to things like cutting tools and drilling equipment. Cobalt also finds its way into a variety of electronics applications including circuit boards and photomasks. Consequently, OM Group is enjoying the rebound in demand in a variety of industrial markets, electronics, and the automobile and tire sectors.

Options in Batteries
OM Group's battery technology business also gives the company some interesting potential growth options. Cobalt has long been used in batteries, but OM Group is going a step further than just providing components.

With a fully-fledged business of its own, the company is targeting markets like aerospace, defense and healthcare. Not only does the company have the opportunity to sell batteries to the likes of Raytheon (NYSE:RTN) and Boeing (NYSE:BA) for a variety of aerospace and military applications, but the company is also looking to take on Greatbatch (NYSE:GB) in the medical arena - a place where business is not easily won, but where the returns can be very attractive. (For more, see Prospects In Strategic Metals.)

Of course, there is also the electric car angle. At present, OM Group is positioned more as a supplier to potential winners like Johnson Controls (NYSE:JCI), which uses cobalt in many of its batteries. If batteries containing cobalt really take off as a power source for electric cars, hybrids or start-stop systems, it could be a meaningful opportunity.

The Bottom Line
Oftentimes it feels almost pointless to talk about valuation when it comes to commodity companies. For better or worse, they trade on investor excitement and anticipation of future commodity price swings - and few people have demonstrated any long-term ability to predict those.

However, OM Group just seems too cheap. The stock trades for less than 4x its forward EBITDA estimate, at a time when many commodity companies trade at 6-9x that forward number. Moreover, the company trades below book value and nearly one-third of the stock's price is cash on the balance sheet. OM Group has all (or at least most) of the risks that go with commodity investments, but at today's prices and given the health of the company's target markets, investors should give it a serious look. (For more, see The Value Investor's Handbook).

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