Situation: Industrial and/or agricultural commodities represent the necessary feedstocks (i.e., inputs) for producing the items that are sold by many companies. The “spot price” for a commodity can vary widely, often driven by scarcity. Other influencing factors include production bottlenecks, transportation problems, weather, war, and changes in currency valuation that the commodity is priced in - usually the US dollar. For many commodities, prices are set for future sale through “futures contracts” using formal clearinghouses and regulated futures exchanges. For other commodities, an informal “forward contract” between parties is arranged through a bank. Additional companies have sprung up around production and/or transportation of key commodities, and have learned to factor in the many problems entailed. These are the types of companies we will examine for investment value this week.
Goal: To orient the investor to the few commodity-related companies that meet ITR’s investment criteria.
Such commodity-related companies are a key category of stock ownership. Why? Because most commodities are priced in US dollars (but produced elsewhere), which becomes a major factor driving total return for those stocks. Owning stock in such a company gives the investor insurance against devaluation of the dollar (currently running +5% per yr). Another reason is that economic activity is, in large part, a function of commodity consumption. For example, you may have heard the term “Dr. Copper” thrown around by market pundits on TV shows. It simply means that a change in the price of copper foretells a change in GDP of countries that require large amounts of copper to expand their infrastructure. So the most credible “weatherman” for predicting the economic climate in China, for instance, is the price of copper from mines in Northern Australia and Indonesia.
Futures exchanges trade the most common raw commodities (e.g. oil, natural gas, corn, wheat, copper, gold). Roughly half of the companies in these markets process and/or transport raw commodities. The others are end-users or speculators who bet on price changes. ExxonMobil (XOM), Chevron (CVX), and Occidental Petroleum (OXY) are commodity-related stocks that meet our investment criteria. Two foreign stocks BHP Billiton (BHP, an Australian mining company) and Total SA (TOT, an integrated oil company in France) also appear to meet our criteria. Neither has been assigned a quality rating by S&P but both have total returns, large and growing dividends, and bond ratings consistent with our criteria (see the ITR Mission & Goals).
Two other economic sectors contain some companies that are commodity-related:
Goal: To orient the investor to the few commodity-related companies that meet ITR’s investment criteria.
Such commodity-related companies are a key category of stock ownership. Why? Because most commodities are priced in US dollars (but produced elsewhere), which becomes a major factor driving total return for those stocks. Owning stock in such a company gives the investor insurance against devaluation of the dollar (currently running +5% per yr). Another reason is that economic activity is, in large part, a function of commodity consumption. For example, you may have heard the term “Dr. Copper” thrown around by market pundits on TV shows. It simply means that a change in the price of copper foretells a change in GDP of countries that require large amounts of copper to expand their infrastructure. So the most credible “weatherman” for predicting the economic climate in China, for instance, is the price of copper from mines in Northern Australia and Indonesia.
Futures exchanges trade the most common raw commodities (e.g. oil, natural gas, corn, wheat, copper, gold). Roughly half of the companies in these markets process and/or transport raw commodities. The others are end-users or speculators who bet on price changes. ExxonMobil (XOM), Chevron (CVX), and Occidental Petroleum (OXY) are commodity-related stocks that meet our investment criteria. Two foreign stocks BHP Billiton (BHP, an Australian mining company) and Total SA (TOT, an integrated oil company in France) also appear to meet our criteria. Neither has been assigned a quality rating by S&P but both have total returns, large and growing dividends, and bond ratings consistent with our criteria (see the ITR Mission & Goals).
Two other economic sectors contain some companies that are commodity-related:
(a) railroads and other shipping companies
(b) electric utilities
Most of the bulk cargo carried by freight trains and river barges is either a commodity or a commodity chemical. One of the railroads, Norfolk Southern (NSC), meets our quality criteria.
Some electric utilities source energy directly from their own wind farms and solar arrays instead of relying 100% on outside energy sources, such as natural gas, coal, and processed uranium. Wattage obtained from wind or solar is undependable and difficult to store (batteries aren’t yet big enough), so excess power is promptly sold to other power companies on the grid: A modern electric utility consists of a state-regulated monopoly alongside an unregulated subsidiary that markets electricity to the highest bidder anywhere in the US. The leading electric utility in North America in sourcing energy from wind and solar is NextEra Energy (NEE) and it meets the ITR quality criteria.
Finally, there are two companies that produce and transport various industrial gases, Praxair (PX) and Air Products (APD). Their products are vital to a wide range of industrial processes and are in almost constant demand. These gases are marketed through forward contracts on a custom basis, much like an unregulated commodity.
Bottom Line: We have introduced 9 companies that produce, transport or market commodities as their key business and also meet the ITR investment criteria:
Some electric utilities source energy directly from their own wind farms and solar arrays instead of relying 100% on outside energy sources, such as natural gas, coal, and processed uranium. Wattage obtained from wind or solar is undependable and difficult to store (batteries aren’t yet big enough), so excess power is promptly sold to other power companies on the grid: A modern electric utility consists of a state-regulated monopoly alongside an unregulated subsidiary that markets electricity to the highest bidder anywhere in the US. The leading electric utility in North America in sourcing energy from wind and solar is NextEra Energy (NEE) and it meets the ITR quality criteria.
Finally, there are two companies that produce and transport various industrial gases, Praxair (PX) and Air Products (APD). Their products are vital to a wide range of industrial processes and are in almost constant demand. These gases are marketed through forward contracts on a custom basis, much like an unregulated commodity.
Bottom Line: We have introduced 9 companies that produce, transport or market commodities as their key business and also meet the ITR investment criteria:
- Exxon Mobile (XOM)
- Chevron (CVX)
- Occidental Petroleum (OXY)
- BHP Billiton (BHP)
- Total SA (TOT)
- Norfolk Southern Railroad (NSC)
- NextEra Energy (NEE)
- Praxair (PX)
- Air Products (APD)
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