Is It Time to Buy Commodities?
(Continued from Prior Part)
Commodity pressure continues
None of these factors are likely to change in the near term, meaning that commodity prices are likely to remain under some pressure. This suggests that for investors, the better opportunity may be in the companies that produce the commodities, rather than in the commodities themselves. Many of these stocks already reflect quite a bit of bad news. For instance, based on my calculations using Bloomberg data, the US energy sector, as measured by the S&P 500 Energy Index, is currently trading at roughly 1.60x book value, a 40 percent discount to the broader market and in line with lows seen in 2009. Meanwhile, metal stocks are selling at an even greater discount, my calculations show, with the S&P Metal and Mining Select Industry Index trading at close to book value and barely 11x earnings. Finally, potential supply cutbacks — most recently, copper producer Freeport-McMoRan Inc (FCX). said it’s mulling cutbacks — will eventually help constrain supply and help stabilize prices.
But for now, with commodity prices still falling and global growth slowing, it may be too early to aggressively buy commodity producers. Still, investors looking for bargains in an otherwise stretched market should keep an eye on these stocks.
Market Realist: Commodity producers a bargain at the moment?
The graph above compares the price-to-book ratio of the S&P 500 (SPY) (IVV) with that of the S&P 500 Energy Index, along with their 15-year averages. The energy index (XLE) is trading at 1.6x compared to its long-term average of 2.4x. Meanwhile, the S&P 500 is trading at 2.8x compared to its 15-year average of 2.7x. The energy sector seems to be trading at a deep discount to its long-term valuations and the S&P 500. The sector is trading at a 42% discount to the broader markets. Historically, though, it has traded at an 11% discount to the S&P 500.
It appears that the markets have factored in a lot of bad news in terms of both crude oil (USO) prices as well as commodity producers’ stocks. However, it may take a while for commodity prices to come around. ExxonMobil (XOM) and Chevron (CVX) reported their worst earnings in six and twelve years, respectively. Chevron recently said it would lay off 1,500 people in order to cut $1 billion in expenses. While valuations are cheap, now may not be the best time to enter production stocks.
For more on this topic, read Gold Is Losing Its Sheen: Where’s It Heading?
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