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Commodity Trends: Raw Material Stocks Are Outperforming

Rebecca Lipman, Kapitall
November 29, 2011

Commodities are beating equities for a fifth consecutive year, reports Bloomberg, a sign that developing countries are sustaining the growth that drove up prices nearly fourfold in a decade.

While most indexes have been doing poorly due to concerns of a global economic slowdown, the Standard & Poor's GSCI Index of 24 commodities climbed 2% this year. This is considerably better than the last time there was a recession and raw material prices fell 43%.

While this demand and price increases may not be favorable to profit margins of the industries that require them for their goods and services, it does provide an opportunity for raw material investors.

Developing countries have also produced a metaphorical padding for an economic crash, ensuring it will be a softer landing. What's more, "a soft landing means we probably are in an ongoing recovery, which makes it very likely that commodities go onto new highs," according to James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management.

Winning numbers
"China, the biggest user of everything from energy to copper to cotton, will lead gains in a projected 6.1 percent expansion in emerging economies next year, more than compensating for the anticipated 1.9 percent growth in the developed world, the International Monetary Fund says." (via Bloomberg)

Ten members of the S&P GSCI rose this year, reports Bloomberg, led by gasoil, gold and feeder cattle, while the biggest losers were cotton, nickel and sugar."

"Barclays Capital expects demand for copper, aluminum, zinc, tin, nickel and lead to rise next year. Combined stockpiles of coarse grains including corn and wheat will drop to the lowest since 2009, according to USDA data compiled by Bloomberg. Global oil demand will exceed production for a third year, the U.S. Department of Energy estimates."

Investing ideas
Do you think commodities will continue to outperform the broader market? If you do, the following list might offer an interesting starting point for your own analysis.

To create this list, we started with the 200 largest basic materials stocks. To refine the list, we only focused on the names that have proven themselves to be more profitable than their competitors, based on net and gross profit margin trends over the last twelve months.

To further refine the list, we only focused on names that have seen a rise in their projected earnings per share.

Wall Street analysts seem to think there's more upside to these profitable commodity stocks -- do you agree?

List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)

List compiled by Eben Esterhuizen, CFA:

1. Monsanto (NYSE: MON  ) : Provides agricultural products for farmers in the United States and internationally. TTM gross margin at 56.62% vs. industry average at 37.93%. TTM operating margin at 21.19% vs. industry average at 17.37%. TTM pre-tax margin at 20.08% vs. industry average at 16.17%. The EPS estimate for the company's current year increased from 3.44 to 3.46 over the last 30 days, an increase of 0.58%. This increase came during a time when the stock price changed by -11.41% (from 76.43 to 67.71 over the last 30 days).

2. National Oilwell Varco (NYSE: NOV  ) : Designs, constructs, manufactures, and sells systems, components, and products used in oil and gas drilling and production; provides oilfield services and supplies; and distributes products, and provides supply chain integration services to the upstream oil and gas industry worldwide. TTM gross margin at 35.17% vs. industry average at 34.55%. TTM operating margin at 20.08% vs. industry average at 18.02%. TTM pre-tax margin at 19.91% vs. industry average at 16.09%. The EPS estimate for the company's current year increased from 4.49 to 4.68 over the last 30 days, an increase of 4.23%. This increase came during a time when the stock price changed by -14.8% (from 75.73 to 64.52 over the last 30 days).

3. Sigma-Aldrich (Nasdaq: SIAL