Commodity prices keep rising amid various supply chain disruptions. That’s causing panic buying of raw materials. As a result, many commodity stocks have reported strong numbers in their recent earnings reports, and banking analysts seem to think that inflationary prices will continue to drive earnings higher.
I’d argue that there’s an added dynamic to many metals producers; there’s a new paradigm on its way for energy production. Many of these producers I mention in this article have prepared themselves well to supply future shifts in energy sources, such as nuclear and hydrogen exploits.
As for the traditional energy-based suppliers I’ve mentioned, the application of new technology and the trend to move to brownfield projects instead of exploiting greenfields have assisted in providing more shareholder value.
My top commodity stocks picks today are:
- Barrick Gold (NYSE:GOLD)
- BHP Group (NYSE:BHP)
- Cameco (NYSE:CCJ)
- Chevron (NYSE:CVX)
- Devon Energy (NYSE:DVN)
- Sibanye-Stillwater (NYSE:SBSW)
- Suncor (NYSE:SU)
Let’s get stuck in!
Commodity Stocks: Barrick Gold (GOLD)
Barrick is one of the world’s largest producers of gold and could well become the prevalent gold mining powerhouse as it continues to conduct exploration projects alongside Newmont (NYSE:NEM) through its Nevada Gold Mines joint venture. Although there’s been a snag due to maintenance requirements, NGM should contribute significantly to Barrick’s top-line growth in the future.
This is being accompanied by the tangible results that Barrick is experiencing through its 2019 Randgold merger, which has played its part in boosting Barrick’s revenue growth by 34.2%, and 29.6% since 2019.
Sure, Barrick Gold’s stock has traded down by more than 30% over the past year, but investors need to understand that this is due to high mergers and acquisitions or exploration activity. Positive results from these investments have started reflecting in Barrick’s financial statements — it managed to deleverage its balance sheet by approximately 28% since 2019 while increasing its net income margin by roughly 74% in the same amount of time.
Wall Street is optimistic about Barrick’s prospects, with the analysts on Tipranks rating it a strong buy, with a price target almost 50% above its current price.
BHP Group (BHP)
BHP Group’s prospects are looking up as it’s set to benefit from corporate restructuring. The diversified natural resources producer is set to unify its two parent companies into one entity, enabling corporate actions to happen more swiftly, and shareholder compensation more efficiently.
Apart from restructuring benefits, the company has just come off a strong six months. In August, BHP reported a 69% year-over-year EBITDA increase, a 66% reduction in total debt, and a 140% increase in free cash flow.
Goldman Sachs expects iron ore prices to rise to the $195 level to carry BHP stock further into the next 12 months, which could be a significant driving factor for BHP’s earnings.
The company expects earnings sustainability in earnings moving forward as it released a special dividend after half-year results. BHP’s dividend yield is now over 10%, and there’s plenty of capacity left for a dividend increase if you look at its net income margin (18.46%) surpassing its five-year average.
BHP stock could be both a dividend play and a potential index beating stock for the foreseeable future.
Commodity Stocks: Cameco (CCJ)
This stock is probably the riskiest bet of the lot, but it could be the most rewarding. Cameco is one of the uranium stocks on the radars of the Reddit crowd lately.
I’m not surprised that retail investors have taken note of uranium’s prospects.
Cameco is the world’s largest uranium producer, and uranium’s main use is for nuclear fuel. An increasing number of indicators suggest that nuclear energy could be one of the predominant low-carbon energy sources in the coming years.
According to a source at Barclays, nuclear energy requires less waste management than current renewable options such as solar. Nuclear energy is also practical as it doesn’t rely on seasonality, nor does it require large storage units. Safety and disposal issues remain a concern, but the debate remains that improved reactor safety mechanisms could quell many dangers.
Nuclear energy currently makes up 10% of global energy. China is expanding on its 49 operational nuclear energy plants, with 17 under construction and another 100 set to be constructed before 2035.
The scarcity of uranium means that it’s incredibly elastic, and such nuclear demand could be the benefactor to Cameco.
Chevron really is the cornerstone of the energy stocks I’ve picked today. The other stocks are trading at high betas while Chevron is a less risky option, often seen as a dividend play.
The oil and gas giant returned to profitability in its second quarter as its operations have normalized after Covid-19 disruptions. Chevron beat its revenue estimates by $1.15 billion and posted a profit of $3.08 billion, in turn achieving an EPS beat of 11 cents.
With WTI Crude Oil trading in and around the $70 per barrel handle, Chevron’s breakeven of $40 is provided with breathing space, which leads me to conclude that margins will remain strong for the foreseeable future.
Acquisition activity is also improving topline revenue and cost-cutting ability. Chevron’s acquisition of Noble Energy in 2019 is starting to pay off through strengthening its presence in the Permian basin, strengthening operations in the D-J Basin, and Eagle Ford.
Chevron stock is anticipated to benefit from its $2 billion-$3 billion annual stock buyback pledge. Chevron is also a dividend aristocrat and has a dividend yield of 5.5%, with five years of consecutive dividend growth.
It’s a good buy all around.
Commodity Stocks: Devon Energy (DVN)
Devon Energy took everybody by surprise in August as it beat its second-quarter earnings estimates by $420 million. Operating cash flows surged by 85% year over year and free cash flow increased by 600% as well, leading to a Non-GAAP EPS beat of 7 cents.
Devon Energy’s performance has been ignited by its merger with WPX to strengthen its foothold in the Delaware Basin. The synergies from the deal are expected to increase free cash flow margins, which could add intrinsic value to the stock.
Another factor that I like is the company’s utilization of production technology and its shift from greenfield projects to brownfield projects, resulting in better re-investment rates. Fitch has taken note of this and recently upgraded Devon’s credit rating to BBB+ from BBB.
Sibanye provided stellar half-year results, as prices within its platinum metals group strengthened. Sibanye’s half-year report stated that it earned $6.18 billion in revenue (87.3% year-over-year increase). Furthermore, adjusted EBITDA grew to $2.79 billion, from $990 million a year ago. Due to its sublime results, Sibanye declared a $0.77 dividend per American Depositary Receipt.
There’s plenty of optimism surrounding Sibanye moving forward. Sales of rhodium and lithium to supply renewable energy sources have added to its already sound revenue mix. Since the company acquired Lonmin in 2019, its platinum segment has bolstered topline growth
That has caused much optimism on Wall Street, with both RBC Capital and J.P. Morgan expecting the stock to more than double in price.
Commodity Stocks: Suncor (SU)
Suncor is one of the most exciting energy stocks to me. Goldman Sachs recently removed Suncor from its conviction list. Reasons included a lack of catalysts and the maintenance work on its Fort Hills plant.
However, I think any investor with a horizon of more than 12 months should benefit from having Suncor in their portfolio. The company offers value from a variety of diversified operations, including oil sands, conventional production platforms, and ownership of 1100 Petro Canada retail & wholesale outlets. This allows it to take advantage of superior margins by owning its own supply.
Fort Hill’s maintenance should be done by the end of the year, which could see it return to scale. Production guidance is down to 45,000- 55,000 average barrels per day from its previous 65,000-85,000, but long-term prospects remain.
Suncor’s valuation metrics are sound; The company has a trailing EV to EBIT of 135% better than its sector with a price to earnings of 38% better than its sector median. And with a dividend yield of 3.5%, Suncor could provide investors with the ideal mix of capital gains and income from dividends.
On the date of publication, Steve Booyens held long positions in CCJ, CVX, DVN, SBSW. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.