Economic slowdowns usually mean less demand for energy and industrial inputs like copper, steel, and iron ore. However, as the world continues to industrialize, the demand for these commodities should continue to increase. Therefore, the recent pullback in commodity prices could present a buying opportunity for long-term investors.
The energy sector is down over 20% from its 52-week high, while gold is down 16% from its 52-week high, and the S&P 500 GSCI Copper Index, which tracks the copper industry, is down 30% from its 52-week high. Chevron (CVX +0.66%), the iShares Gold Trust (IAU 0.39%), and Freeport-McMoRan (FCX +2.58%) are three different ways to invest in energy, gold, and copper. Here's what makes each stock a great buy now.
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The Oracle of Omaha sees upside to this oil supermajor
Scott Levine (Chevron): While the markets have shown some signs of bouncing back this week, plenty of high-quality tickers haven't recovered. This has left investors with the ability to snag some quality stocks for a discount -- stocks like Chevron. Warren Buffett, for example, has recognized the opportunity to pick up Chevron on sale. In a recent regulatory filing, Berkshire Hathaway reported that it bought nearly 121 million shares of Chevron during the first quarter of 2022.
Investors today may be unable to pick up Chevron's stock for a price as low as Berkshire Hathaway did last quarter, but that doesn't mean they've missed the boat. Currently, the stock is trading at 8.5 times operating cash flow, a more attractive price tag in light of its five-year average cash flow multiple of 10.2.
Operating in all three segments of the oil industry -- upstream, midstream, and downstream -- Chevron is one of the largest oil companies in the world, and it shows little sign of losing its prominent position anytime soon. One endeavor that will benefit the company considerably, for example, is its growing activity in the Permian Basin. In fact, management projects that oil production in the Permian will contribute to the company generating more than $4 billion in free cash flow in 2026. For some context, Chevron reported overall free cash flow of $21 billion in 2021.
Clearly, Chevron generates a lot of cash, and fortunately for its investors, the company has been generous in returning that cash as a dividend -- something it has been doing for a long time. As a Dividend Aristocrat, Chevron has a track record of rewarding shareholders, making it -- and its 3.9%-yielding stock -- a worthy consideration for veteran and new income investors alike.
NYSE: CVX
Key Data Points
The best way to invest in gold now
Daniel Foelber (iShares Gold Trust): Gold is often seen as a low-risk, low-reward investment. With a blend of practical applications, industrial use cases, and as an input in jewelry and other luxury goods, gold has a good amount of utility. It also has a history that far outlasts any fiat currency and is older than most countries. That gives gold a level of credibility and reliability that is unmatched by any company and arguably any asset.
Yet many investors know that gold has long underperformed the broader U.S. stock market. Unlike a company, gold's price is determined by supply and demand, not the ability to innovate or sell goods and services. Lately, the price of gold has been dragged down by a strong U.S. dollar. A strong U.S. dollar makes dollar-denominated gold more expensive for foreign buyers. Rising interest rates due to inflation make risk-free assets like certificates of deposit or Treasury bills more attractive for some investors than gold -- which has no yield.
But gold is undeniably an excellent asset when the global economy is weakening, or belief in fiat currencies begins to wane. Therefore, the sell-off in gold could be a good time for investors to consider adding a little bit of the yellow stuff to a diversified portfolio. There are a few different ways to do this. The basic three are either by purchasing physical gold, which fetches a premium above spot and has a slew of security and storage risks. Or buying a gold mining stock. Or my personal favorite, simply buying a gold exchange-traded fund.
The iShares Gold Trust is the second-largest gold ETF by market cap. It has a low expense ratio at just 0.25%. It also has 503 tonnes of gold insured and safely stored. The ETF provides a way to invest in that trust virtually. Gold will probably continue to underperform the U.S. stock market over the long term. But for risk-averse investors more concerned with capital preservation than growth, gold makes a lot of sense on sale now.
Freeport-McMoRan, the pick of the copper miners
Lee Samaha (Freeport-McMoRan): If you are looking to play a bounce in the price of copper, then look no further than Freeport-McMoRan. Obviously, buying Freeport stock is a vote of confidence in a recovery in the copper price after the severe sell-off over the last two months. However, it's also a recognition that Freeport is the best-placed major copper miner on the market. The reason is that Freeport has major expansion projects in Indonesia and the U.S., and relatively less exposure to countries like Chile and Peru, which carry more political risk.
Moreover, it's worth noting that even after the big fall in the price of copper (from around $4.80 per pound in mid-April to around $3.30 per pound as I write), Freeport is still highly profitable. In fact, according to management on the second-quarter earnings call, Freeport would generate at least $6 billion in earnings before interest, taxation, depreciation, and amortization (EBITDA) on average in 2023/2024 even with a copper price of $3 per pound. Given that its market cap is just $41.4 billion, it makes it look like a good value.
As such, Freeport-McMoRan stands well placed to benefit from any uplift in copper prices due to ongoing economic demand, notably as part of the electrification trend and growth in electric vehicles and renewable energy.
