Commodity stocks aren't for the faint of heart... you need to be able to hold your nerves through business cycles if you own them. But for those who can stomach the volatility, commodity stocks could reap rich returns in the long run.
Choosing which commodity stocks to invest in, however, can be a daunting task, as commodities include a whole gamut of natural resources like precious metals, oil, and coal, base metals like copper and iron ore, agricultural commodities, rare earth metals, and even minerals like uranium and lithium, leaving you with hundreds of stocks from which to cherry-pick. To make things a bit easier for you, I've selected BHP Billiton (NYSE:BHP), Franco Nevada Corp (TSX:FNV), VanEck Vectors Agribusiness ETF (NYSEMKT:MOO) as three commodity stocks you could consider right now. Here's why.
A top diversified base-metal commodity play
BHP Billiton is one of the most diversified commodity stocks. The company mines iron ore, metallurgical coal, copper, zinc, nickel, and potash, among others. And that's not all: BHP is also an oil and natural gas producer. BHP Billiton is, in fact, among the world's top producers of most of these commodities, which means you essentially own a stake in an industry leader when you're buying BHP Billiton stock.
There's a lot brewing inside BHP Billiton currently. Activist investor Elliot Management is pushing management to scrap its Australia-London dual-listing structure and spin off its U.S. oil assets, among other moves to unlock greater value from its core metals-and-mining businesses. The collapse in iron ore, and then oil, prices in recent years put tremendous pressure on BHP's top and bottom lines, and it has already written down more than 60% of the $20 billion it had invested in the U.S. shale assets in 2012.
The good part is that BHP Billiton has become leaner and stronger in recent years, having spun off South32 a couple of years ago and intently cutting costs and strengthening its balance sheet all the way through. With key commodity prices bouncing off lows in recent months, BHP Billiton could be a great bet to play the upturn.
A unique precious-metals and oil play
There are plenty of good gold and silver stocks to invest in, but Franco Nevada's business model and growth plans have me intrigued. As a streaming and royalty company, Franco Nevada buys precious metals from other miners at low prices in exchange for funding them upfront. This means the company doesn't have to bear any of the costs and risks associated with mining, can earn higher margins on sales, and gives you just as much exposure to gold and silver prices as a mining stock.
Even within the precious-metals streaming space, Franco Nevada is the only one that deals in platinum group metals and oil. A diversified portfolio and a strong mix of streaming assets have driven the company's profits, cash flows, and dividends higher in recent years. Going forward, Franco Nevada expects to increase its gold equivalent ounces by nearly 14% at the midpoint of 2016 production by 2021, and believes its revenues from oil and gas could triple in the next decade.
When you further factor in Franco Nevada's impressive nine-year consecutive streak of dividend increases, you'd likely be better off buying this stock over a traditional gold or silver miner in the long run.
An offbeat way to bet on agricultural commodities
Agricultural commodities get the least attention from investors, but the essential nature of the industry makes investing in agricultural stocks a logical move. Instead of investing in one stock, though, you could consider a basket of agricultural stocks to mitigate the volatility associated with industries like fertilizers. The easiest and best way to do this is to buy the VanEck Vectors Agribusiness ETF.
To give you an idea about the kind of diversification this ETF can offer agricultural investors, consider that, as of June 30, 2017, its five-largest holdings -- which also made up one-third of its total portfolio -- included seed and biotechnology company Monsanto, farm-equipment manufacturers Deere and Kubota, animal health company Zoetis, and food processor Archer Daniels Midland. With fertilizer names missing there, it's not surprising that the ETF has handily outperformed leading pure fertilizer plays in the past five years when fertilizer markets were in turmoil.
With a cumulative return of almost 46% since inception in 2007, the VanEck Vectors Agribusiness ETF is one of the best ways for investors to gain exposure to agriculture.
Of course, you may choose your stocks based on what commodity you're bullish on and are looking to gain exposure to. But if base metals, gold, and agriculture fall in your interest area, the above three stocks look capable of navigating the rough seas, which is a key criterion to consider before you invest in commodities.