Bloomberg reports that hedge funds, which have been largely bearish on commodities, have turned bullish by the most since August on optimism the global economy will avoid another recession, boosting prospects for raw-materials demand.
"Money managers raised combined net-long positions across 18 U.S. futures and options by 12 percent to 737,647 contracts in the week ended Oct. 18, Commodity Futures Trading Commission data show. Wagers increased most in energy and agriculture, led by heating oil, gasoline, coffee and soybeans."
The S&P GSCI index tumbled 12 percent in September, the biggest loss since the financial slump of 2008. In October, it climbed 7.4%, on track to be the biggest monthly advance of the year.
The dip came as a reaction to the stream of negative news on European sovereign debt crises, unemployment, and slow economic growth -- all of which signaled a drop in commodity demand.
But recent economic indicators including a boom in construction and manufacturing orders have soothed the "end of the world" mentality gripping investors. And if the economy looks like it is going to grow, commodities are generally a good tagalong indicator as well as a way for investors to jump on the bandwagon.
"Prices rebounded on signs that supplies of metals, energy and agricultural products are still falling short of demand," says Bloomberg.
Based on the data, hedge funds appear to think commodity prices are undervalued. With this in mind, we wanted to create the following list.
We started with the 200 largest basic material stocks and identified the most undervalued names (defined by the levered free cash flow to enterprise value ratio).
In addition, we collected data on institutional money flows and identified the undervalued names that have seen significant institutional buying during the current quarter.
Big money managers seem to think these undervalued stocks will soon trade at a premium -- do you agree with their optimism?
List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. CF Industries Holdings
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above.