In a previous column, we featured 8 favorite energy stocks for 2018, chosen by leading newsletter advisors for MoneyShow’s 35th annual Top Picks report. Outside of energy, eight experts also see opportunity in a diverse group of commodity plays ranging from gold, copper, cobalt and iron ore to salt mining and water resources.

 

Adrian Day, The Global Analyst

Osisko Gold (OR) is the newest and smallest of the “big four” gold and silver royalty companies; this business model allows companies to benefit from rising precious metals prices without the geologic, political and social risks of mining.

I am a big fan of this group, which also includes Franco-Nevada (FNV), Royal Gold (RGLD) and Wheaton Precious Metals (WPM). These companies have advantages over bullion ETFs since they have leverage to rising prices and pay dividends. Franco, Royal and Wheaton have all been huge winners over the years.

Osisko was backed into being a royalty company when it sold the Canadian Malartic mine it had developed following a hostile takeover attempt, keeping a very generous royalty on the mine. It soon added a second major royalty on a long-life Quebec mine when it purchased Virginia Mines. Other acquisitions and investments now give Osisko 131 royalty and stream assets, of which 16 are currently cash flowing. Most of these assets are in Canada. Cash flow from these royalties could double by 2023, without any increase in the price of gold.

Osisko differentiates itself from the other large royalty companies through its “accelerator program” by which Osisko takes stakes in exploration companies and through the expert exploration team it acquired when it bought Virginia and the top development team from building Malartic, helps the companies develop projects, earning a royalty in exchange. The value of the shares held through these investments is well over C$400 million. That’s in addition to the $405 million in cash.

So Osisko has a solid balance sheet, an experienced management team, a diversified portfolio and built-in growth. It remains, however, the most speculative of the big four royalty companies — and that’s a relative comment, given the low-risk nature of the group — and the one with the lowest valuation. But Osisko is rapidly catching up, and as it does, the stock will re-rate to the lofty premiums enjoyed by the others.

 

Carla Pasternak, Dow Theory Letters' The Income Investor

Copper and gold miner Freeport McMoRan (FCX) is expected to grow earnings per share nearly fivefold this year, another almost 50% in 2018 and more than 70% annually over the next five years. Earnings are forecast to rise mainly in the wake of higher copper prices, which are currently trading at a three-year high at better than $3 a pound. Prices have been trending higher this year as China’s crackdown on its copper smelters to control pollution has increased its reliance on copper imports.

A lack of reserves to meet projected demand for copper in the coming years is also pushing prices higher. As the world’s largest publicly traded copper producer, with over 50% of revenue derived from copper, Freeport-McMoRan is expected to benefit from higher prices.

Uncertainty about the fate of its Grasberg copper mine in Indonesia has been a large overhang for the shares, but the clouds are clearing. Right now, Freeport owns 91% of Grasberg, the world’s second-largest copper mine, and the Indonesian government owns the balance.

In an effort to control the country’s natural resources, Jakarta is demanding mining companies get new licenses and build smelters for local production. In response, Freeport said it will sell a 51% interest in the mine to the state if it can retain operating control until 2041. At stake is whether the two parties can agree on price for this interest.

Investors are optimistic that the parties are close to closing in on a deal that’s a win-win for all sides. The government would get a bigger stake in the open pit mine, but Freeport would have enough of an interest to support an underground expansion project that would generate additional corporate revenues while also funding local government coffers.

Investors are starting to take notice. But they are still trading at a forward PE of only 10 times and a 1-year trailing price to earnings growth rate of just 0.5, which leaves room for considerable upside. (A PEG of 1.0 or less represents good value.) For almost the last two years, the shares have been dead money. In the last several weeks, however, the technical picture has radically changed. In December, the stock broke out above $17 resistance that had restrained it for almost a year.

After a long period of sideways movement, the 10-week and 40-week moving averages are now both below the share price and beginning to slope bullishly upward. The 10-week crossed above the 40-week in August 2017, forming a bullish golden cross. The next important resistance I see is in the $23-$24 range, a brief support level in 2013 and recovery peak in 2015. My stop would be $13.79. Since old resistance should be new support, there should be prior buying interest near $17 if there is a retreat.

 

John Dobosz, Forbes Dividend Investor

Overland Park, Kansas-based Compass Minerals International (CMP) produces salt and magnesium chloride for use in road deicing and dust control, food processing, water softeners, pool salt and agricultural and industrial applications. It mines for salt hundreds of feet below ground, using both drill-and-blast and continuous mining techniques, and its mine in Goderich, Ontario is the largest rock salt mine in the world.

Revenue in 2017 is expected to climb 20.5% to $1.37 billion, with net operating cash flow rising 63% to $262.6 million, and $174.5 million in free cash flow. Compass generated $11.75 in free cash flow per share over the past 12 months, well above the $2.88 it pays annually in dividends. The next ex-dividend date coming up for a payout of at least $0.72 per share rolls around in late February.

In addition to Compass trading at discounts to five-year averages on most measures of value, there is also some strong seasonality that makes it look attractive. For the period between November and February, the stock has risen in every year except for two since Compass went public in December 2003. The company’s chief financial officer in August purchased 300 shares at prices above $66 per share.

 

Tony Daltorio, Growth Stock Advisor

Water is a scarce resource, despite the fact that it covers about 70% of our planet. Fresh water is extremely scarce, accounting for a mere 3% of the world’s supply. Of the amount of fresh water that is available, roughly 70% goes to agriculture to feed the world’s population. The enormous amount of water needed to grow the crops and livestock needed to feed and clothe the world’s growing population is creating a dire global situation.

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According to the United Nations, more than 1.6 billion people are currently living in places where sustainable water use has already reached its limits. McKinsey, a consulting firm, estimates $7.5 trillion worth of investments are needed in the sector by 2030 to keep pace with the projected increased demand for fresh water.

That’s where Xylem (XYL) — my top pick for growth investors for 2018 — comes in. This water technology company was spun off from ITT Corporation in 2011 and included all of ITT’s water businesses. Its corporate mantra is “Let's Solve Water” and it does so through the creation of innovative solutions using smart technology.

Following the acquisition of Sensus in 2016, Xylem now operates in three segments. The Water Infrastructure segment includes the company’s business surrounding the sourcing, collection, treatment and transportation of water. The primary customers in this segment are public utilities and large industrial companies.

The Applied Water segment involves the Xylem’s products and services sold to residential, commercial, industrial and agricultural end-users.

The third segment is Sensus. It represents the company’s largest foray into the smart technology market. Sensus is all about technology and includes a variety of smart meters, cloud-based analytics software, remote monitoring and data management systems and smart lighting.

Xylem’s reach is global, generating revenues ($4.5 billion in 2016) in over 150 countries. The U.S. accounted for 46% of revenues, Western Europe for another 27% of revenues, the fast-growing emerging market segment now accounts for 20% of revenues and the rest of the world filled in the remaining 7%. In China, the company experienced a 19% rise in orders last year.

The company experienced 5% organic growth year-on-year recently, largely driven by very robust demand from public utilities as well as stronger industrial end-market demand. This should improve further as the company's analytics and Sensus business really get rolling.  With all the world’s water problems, I see an extended period of robust growth for Xylem.

 

Jim Powell, Global Changes & Opportunities Report

Several technology trends are greatly increasing the demand for the metals that make them possible. The demand for cobalt is shooting up. The metal is a critical element in the production of lithium batteries in electric cars, an application that consumes 42% of production.

Cobalt prices doubled in the last year alone. Some energy analysts are predicting a 30-fold increase in cobalt demand within 10 to 15 years, which should send its price into the stratosphere. This is a hot new metal play that few investors know about.

I believe the best cobalt investment is Glencore Plc (GLNCY), a large UK miner and commodity trader. Glencore is primarily a copper producer, but it is also the world’s leading producer of cobalt and quite a bit of the world’s nickel. All three metals are needed in large quantities in electric cars and many other battery-powered devices.

There is one caution with Glencore that you should know about. The company has important operations in central Africa, a region known for instability and corrupt leaders. However, all the leaders are accustomed to the taxes and other benefits that Glencore produces. I think Glencore will be volatile but a winner. The stock is my top pick for speculative investors for 2018.

 

Mary Anne and Pamela Aden, The Aden Forecast

The commodity market is coming alive. After years of low prices, the stronger global economy means that we’ll likely see far better times in the resource sector as 2018 unfolds. Copper seems to be leading the pack and the future looks bright. With demand growing it’s set to head higher. That’s especially true considering the growing popularity of electric cars and their future growth potential. This alone will keep strong upward pressure on copper.

A renewed strong rise in copper began this year, reinforcing a solid uptrend since 2001. Also, note the developing upchannel encompassing the 1990s to today. This is bullish technical action and several of the other resources are following copper’s lead. Crude oil, for instance, is also strong. With production slowing, we could see the oil price much higher in the months ahead.

Considering these factors and more, our top pick is BHP Billiton (BHP). This company is one of the biggest resource companies in the world including iron ore, coal, copper and uranium. And since it deals with a wide variety of resources, it’s a good all-around stock to own in order to benefit from the upcoming strength in this sector.

 

Jim Pearce, Personal Finance

BHP Billiton (BHP) is a hard asset producer domiciled in Australia that generates most of its revenue in Asia and Europe. The company is ideally positioned to benefit from the three major macroeconomic conditions that are likely to dictate stock market performance over the next 12 months.

First, I expect a correction in the U.S. stock market to occur soon, which could trigger a rotation out of domestic stocks into foreign companies with cheaper valuations. Europe and China have been lagging the U.S. in recovering from the Great Recession, but are gaining momentum. Second, I expect the pace of inflation to increase in 2018 as central bankers in Europe and Asia gradually raise interest rates, which should push commodity prices higher.

Third, I expect oil prices to rise in 2018 as global demand exceeds production by a significant margin for the first time since oil prices began falling three years ago. Crude oil inventories have dissipated to historically normal levels, so the price of oil will be more sensitive to changes in supply going forward than it has been recently. All three of these conditions play directly into the restructuring strategy BHP has been executing over the past two years.

It has sold off non-core assets to pay down debt by $98 billion last year. BHP also is selling its U.S. oil business to focus on Asia. The company has a stated goal of doubling its return on capital over the next five years, which should considerably increase its profit margin while more top-line revenue comes in from rising oil and commodity prices. BHP is the safest bet to outperform the overall stock market given the circumstances that will probably unfold over the next 12 months.

 

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