Commodity-linked stocks, battered for much of 2018, have rallied as a group and are poised to rise higher in 2019 as inflation continues to lift prices, according to JPMorgan. Analyst Shawn Quigg views a more dovish Fed as lifting inflation and the consumer-price index, historically correlated to the performance of mining companies. While the investment firm doesn't mention specific names, major players in the space include Cleveland-Cliffs Inc. (CLF), Royal Gold Inc. (RGLD), Allegheny Technologies Inc. (ATI), Century Aluminum Co. (CENX) and Compass Minerals International Inc. (CMP). As central banks around the world follow suit and become less aggressive in combatting inflation, then commodities and commodity-linked stocks are likely to rebound, he says in a detailed article in Barron's.
The U.S. dollar, after rallying for most of 2018, also seems to be peaking. Because commodities trade in dollars, a weaker U.S. currency would allow buyers worldwide to pay less in local currencies for the same volumes of oil, coal, grain, or metals. A rise in demand also could benefit energy producers and position oil exploration stocks such as SM Energy Co. (SM), Callon Petroleum Co. (CPE), and Valero Energy Corp. (VLO) to outperform, per Barron's.
8 Commodity-Linked Stocks That Could Gain
· Cleveland-Cliffs Inc. (CLF)
· Royal Gold Inc. (RGLD)
· Allegheny Technologies Inc. (ATI)
· Century Aluminum Co. (CENX)
· Compass Minerals International inc. (CMP)
· SM Energy Co. (SM)
· Callon Petroleum Co. (CPE)
· Valero Energy Corp. (VLO)
Mining, Oil and Energy ETFs at Discounts
Despite making a partial comeback in 2019, commodity prices are still well below their 52-week highs. Thus, investor concerns regarding slowing economic growth, U.S.-China trade tensions and excess supply have weighed on commodity companies including energy and mining stocks, with the SPDR S&P 500 Oil & Gas Exploration and Production ETF (XOP) and the SPDR S&P Metals and Mining ETF (XME) still down 11.5% and 13.5% respectively over 12 months.
In a note to clients this week, JPMorgan called fears about the sector overblown. Instead, he said now is an opportunity to buy mining and energy companies and previously mentioned ETFs on the dip. He views a less-hawkish Fed, looser monetary policy worldwide, higher inflation, and a weaker dollar as positive drivers for commodity-linked stocks moving forward.
Goldman Sachs echoed the bullish sentiment on commodity-related companies in a recent note, per Barron's. “For commodities, while expectations for global demand growth rates have declined, in absolute terms the outlook remains strong” given the supply outlook, said Goldman analyst Eugene King.
For mining stocks in particular, King highlighted improved balance sheets and strong free cash flow generation as drivers of higher returns in the form of dividends and stock repurchases. King’s favorite pick in the group is Anglo American (NGLOY), citing its “positive earnings momentum this year.”
Positive drivers aside, it’s important for investors to consider that these stocks are a bet on the global economy at large. Despite JPMorgan's optimism that the Fed's dovish stance will bolster economies around the world, forecasts nonetheless are for slowing growth. If the general forecast prevails, economic deceleration would rein in commodity-linked stocks.