An economic supercycle is a business cycle with sustained economic expansion. A commodity supercycle is when demand continues to outpace supply and leads to strong prices for commodities like oil, natural gas, basic metals, and agricultural products. A commodity supercycle can occur for supply/demand imbalances even when an economic supercycle isn't active.
Strained supply chains and global geopolitical tensions are disrupting global trade and teeing up a potential commodity supercycle. If certain countries decide not to trade with each other, or dramatically reduce trade, that decision will severely impact a lot of businesses. For the U.S. and its allies, it's not just about how much oil and gas, or copper, or lithium, or semiconductors are the world, but rather how much supply exists from America's network of allies relative to demand.
Deere & Company (DE 0.11%), Aspen Technology (AZPN +0.00%), and Rio Tinto (RIO 0.47%) are three companies that are positioned to provide critical goods and services needed in a commodity supercycle. Here's what makes each company a great buy now.
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Hitch a ride on the agriculture giant
Daniel Foelber (Deere): Despite reporting smashing earnings and revenue on Friday, Deere stock suffered its worst daily decline since 2008. For investors who are relatively new to the stock market, seeing a company put up strong results and then watching its stock crash anyway can seem bizarre. And in many ways, it is. But the stock market is forward-looking, meaning it cares more about what is to come than what has already happened. And in Deere's case, the expectation is that the company will face a slowdown if its customers cut spending. Or at the very least, Deere's margins could be squeezed as supply chain disruptions and higher input costs make it more expensive to conduct its business operations.
Struggles aside, the long-term future for Deere looks incredibly attractive. The company is the industry leader or close to the industry leader in each of its segments. Deere is also invested heavily in artificial intelligence (AI) and other technologies to improve crop yield and save its customers money. That investment reduces the total cost of ownership for Deere products and makes them some of the best on the market. Deere's AI investments have been recognized by Ark Invest's Cathie Wood. In fact, Deere is the sixth-largest holding in the Ark Autonomous Technology and Robotics exchange-traded fund.
Deere stock is down a staggering 26% in the last month alone -- which has pushed its price-to-earnings (P/E) ratio down to 16.4 and its forward P/E ratio down to just 13.7. Granted, Deere stock tends to trade at a discount to the average P/E multiple in the S&P 500. But 13.7 is still cheap by Deere's standards given its 10-year median P/E is 17.4. Throw in a 1.2% dividend yield, and you have a value stock that looks poised for higher farming and industrial investment for decades to come.
NYSE: DE
Key Data Points
An industrial software company servicing the energy industry
Lee Samaha (Aspen Technology): The recently formed Aspen Technology is a merger between the old Aspen Technology (industrial software with a heavy focus on energy) and a couple of energy and oil and gas businesses from Emerson Electric. As a result of the merger, Emerson Electric shareholders will own 55% of the new company with Aspen's existing shareholders receiving 45% and $6 billion in cash.
The merger combines Aspen's leadership in industrial asset optimization software with Emerson's power transmission and distribution software (OSI) and oil- and gas-focused Geological Simulation Software (GSS) business. The new company will generate around 40% of its sales from midstream/downstream and upstream oil and gas activity, with a further 18% from chemicals, 22% from power transmission and distribution, and 16% from engineering, procurement, and construction (EPC).
The logic behind selecting Aspen is simple. If there's going to be a commodity supercycle, then there will be spending on energy assets. And there's likely going to be even more growth in spending on the asset optimization software that Aspen offers. Furthermore, the emergence of digital web-enabled technologies is revolutionizing the productivity of industrial software solutions.
In addition, the strategic support of Emerson Electric (a leading process automation company) will strengthen the growth opportunity at Aspen -- Emerson's automation solutions are complementary to AspenTech's industrial software solutions. It all adds up to a company with exciting long-term prospects.
A metals producer that's poised to pop
Scott Levine (Rio Tinto): Commodity prices go up; commodity prices go down. Those familiar with this sector know that downturns -- and subsequent spikes -- are common occurrences; therefore, they're nothing to be feared. One metals stock, in fact, that's well positioned to benefit from an upswing in commodities is Rio Tinto. A leader in producing a variety of industrial metals, Rio Tinto relies most significantly on its iron ore to keep the lights on, but its copper and aluminum operations also figure prominently in the company's financials. Investors, therefore, stand to prosper should there be an uptick in the markets of any one -- or several -- commodities.
There's no certainty that a commodity supercycle is around the corner, but Rio Tinto's strong balance sheet indicates that it's in good financial shape to be OK until the supercycle starts. At the end of 2021, for example, Rio Tinto had a net cash position of $1.6 billion; moreover, the company has a conservative debt-to-equity ratio of 0.24. Pivoting to the cash flow statement, investors will find that the company's tendency to generate strong streams of the green represents another advantageous quality. Over the past five years, Rio Tinto has generated average annual free cash flow of $5.78 per share according to Morningstar.
Currently, shares of Rio Tinto are trading at a discount. Whereas the stock trades at an average five-year average price-to-cash-flow multiple of 7.1, the stock is changing hands today at a ratio of 4.3. And that's not the only perspective from which Rio Tinto's stock seems attractively valued: It's trading today at about 5.1 times trailing earnings, a discount to its five-year average P/E of 10.5.
