Commodity prices can change violently and without warning. That makes it a tough sector for investors as that volatility can make it difficult to sleep at night. Those wanting to invest now are better off sticking with the absolute best stocks in the sector, which I've detailed here. However, for investors interested in commodities, but want to watch from a distance, here are five solid commodity stocks to watch.
Energy prices have been all over the map the past few years. Just take a look at the wild ride of oil and gas prices over the past decade.
That volatility can cause a lot of sleepless nights not just for investors, but for energy executives. That's why it's imperative that an energy company have two things: A strong enough balance sheet so that it can withstand a long down cycle in energy commodity prices and low-cost supplies. Two companies that really fit the bill are ConocoPhillips (NYSE:COP) and EOG Resources (NYSE:EOG).
Both have investment grade credit ratings and fairly low levels of debt. In fact, EOG Resources has the second lowest net-debt-to-estimated 2015 EBITDAX in its peer group. In addition to strong balance sheets the pair are among the lowest cost producers, especially in the top U.S. shale plays, with ConocoPhillips actually having the lowest cost of supply according to Woods Mackenzie. As low-cost suppliers, both ConocoPhillips and EOG Resources continue to make money even as commodity prices fall. It's that strong combination of a rock-solid balance sheet and low production costs that make these solid stocks to watch.
Base metal commodities
With a strong global mining portfolio, Rio Tinto (NYSE:RIO) is a great stock to watch in the mining sector. The company has one of the most diverse mining portfolios in the world as it produces copper, aluminum, diamonds, gold, iron ore, coal, uranium, and industrial minerals. These metals and materials will become increasingly more important in the future as the world's population and economies continue to grow.
It is estimated that by 2030 more than $57 trillion will be spent on worldwide infrastructure to support this growth. That suggests more steel, copper, and aluminum will need to be produced, which means commodity producers will need to boost capacity. While many of the prices for its key commodities are down, those prices are unlikely to stay low forever as higher prices, or much lower costs, are necessary in order to encourage producers to boost production. As a low-cost producer to begin with, this future bodes well for a company like Rio Tinto.
Growing global population trends also bode well for agricultural commodity producers, especially those that produce fertilizers and crop nutrients. These key agricultural commodities are needed in order to meet future food production needs that will require more crop production per acre.
Two stocks to watch here are Agrium (NYSE: AGU) and Mosaic (NYSE: MOS). Agrium is most diversified of the two as it operates two distinct business segments as it not only produces all three key crop nutrients -- nitrogen, phosphate, and potash -- but Agrium is also a leading retailer of seeds, crop protection products, and crop nutrients. Meanwhile, Mosaic is a leading potash producer while also being the undisputed world leader in phosphate as its annual capacity is twice its nearest competitor. With solid crop nutrient and fertilizer production capacity these companies are well positioned to supply farmers with a growing supply of crop nutrients, making both great commodity stocks to watch.
Investing in companies exposed to volatile commodity prices is not for the faint of heart. That's why some investors might want to just stay on the sidelines and watch the sector from the outside for a while. Five stocks to watch are ConocoPhillips, EOG Resources, Rio Tinto, Agrium, and Mosaic as all have solid fundamentals and are well positioned in their industry.