Our favorite way to play commodities today... Why coal has to rise... The vultures are circling... What lower oil prices mean for the sector... Who will survive the downturn?... This stock is cheap (for now)...
Today, we take another look at the commodities market...
Regular Digest readers know commodities have gotten hammered lately. Coal, oil, gold, and platinum – to name a few – are all in the dumps.
One reason for lower commodity prices is the parabolic move in the U.S. dollar. (You can read about the dollar's short- and long-term trends in today's Growth Stock Wire.)
We're also seeing slowing growth from China – the world's largest consumer of commodities – and a dismal European economy.
As we've written many times, commodities are a cyclical business. In short, as prices for a commodity drop, production follows. Eventually, low prices attract more demand. Prices and production rise. The cycle continues.
Mastering the resource market's cyclicality is difficult... though we wrote a book featuring insights from industry experts like Rick Rule, Matt Badiali, and John Doody on how to do it successfully. (Click here if you're interested in purchasing a copy. It could be the best $23 investment you make all year.)
Bear markets in commodities can grind on for a long time. And if predicting price movements based on economic trends wasn't difficult enough, you also have to factor in geopolitical risks, like Russia's effect on oil prices... and how strikes in South Africa will hurt platinum.
Today, we'll look at the recent price action of a few different commodities. We'll review what it means for those markets. And we'll share our favorite way to profit from commodities today.
Let's begin with coal...
There are two types of coal: steam (used for power plants) and metallurgical (used in iron and steel production).
Today, steam coal sells for $52 per short ton, down 63% since 2008.
Unsurprisingly, the Market Vectors Coal Fund (KOL) – which holds a basket of international coal producers, shippers, and equipment-makers – is down 70% from its peak in June 2008.
In addition to the previously mentioned macroeconomic factors that are pulling commodities down, coal also faces competition from natural gas – which has plummeted in price thanks to the ongoing U.S. shale boom.
But we believe the price of coal has to rise. It's still the world's leading energy source, fueling more than half of all energy consumption. It represents 39% of U.S. energy generation. And coal consumption is still growing about 2% a year.
Politicians condemn coal for being dirty. But if they want the lights to stay on, coal will remain a key player in energy production.
In addition to the fact that the world simply needs coal, we're seeing another bullish sign: Coal is trading below its production cost for some manufacturers. Assuming the world needs a given commodity, it can't stay below its production cost forever. Porter and his team explained this dynamic in the June issue of his Investment Advisory...
We know that the price of coal will eventually rise substantially. In some regions, mining coal costs a lot more than the current price. So miners will either stop production or go out of business. As a result, sooner or later, stockpiles will dwindle, supplies will disappear, and prices will soar as shortages "suddenly" cause the market to panic.
As Porter explained in the June 25 DailyWealth, "Globally, demand for both types of coal is expected to increase a combined 58% over the next 20 years."
And the vultures are circling some of the weakest producers, hoping to buy these companies and make a fortune as coal prices recover.
Per the Wall Street Journal, some hedge funds are shorting stocks and bonds of coal producers... then buying their bonds when they fall to huge discounts to "par."
Some investors think many large miners won't be able to last more than one to three years if coal prices stay at current levels.
One potential takeover target is coal producer Walter Energy. Some of Walter's mines could be immediately profitable if not for a huge debt load. The company is on pace to deplete its cash reserves in 18 months, according to research firm Credit Sights.
But the shale boom isn't killing just coal prices. It's also crushing oil prices...
The U.S. is producing 9 million barrels of oil a day, the highest levels since the 1980s.
With so much oil being produced at home, U.S. imports of oil from OPEC nations are down to 2.9 million barrels per day, their lowest levels in 30 years.
As a result, oil prices are hitting their lowest levels since 2010. West Texas Intermediate (WTI) crude – the U.S. benchmark – is trading at $76 per barrel...
Today, lower oil prices are pressuring producers. Saudi Arabia, the world's largest oil producer, hasn't cut production to boost prices. That was the country's typical response for the past 40 years.
Now, the market is trying to figure out whether lower oil prices are temporary or a longer-term problem.
Low oil prices make certain oil projects economically unfeasible. As a result, oil stocks are selling off...
Inevitably, some companies will come out of this rout stronger. Others will fail. But we're bound to see more consolidation in the sector as companies figure out the best ways to position themselves to survive and profit.
Stansberry Resource Report editor Matt Badiali sent us a note about a recent "mega-merger" in the sector...
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As Matt explained, the deal unites two companies looking to compete with oil giant Schlumberger. Halliburton and Baker Hughes want to cut costs, and management estimates the merger will save the companies $2 billion annually.
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Unfortunately, many companies got into shale too late, bought land, and built production capacity at high prices... with borrowed money.
As a result, they can't produce profitably at these price levels and are looking for alternatives.
Companies with access to capital will drive the next phase of the U.S. energy boom. Because of the recent selloff, loans will be more difficult to come by.
Matt developed a proprietary model he calls the "Naked Indicator," which determines which companies will prosper at different oil prices. Matt's model compares 56 companies. Most are cash-flow negative and allocate capital poorly. According to Matt...
The initial results suggest companies who have exploration and production revenue as well as midstream (transport, storage, etc.) revenue will fare better given falling prices.
The good news is that Matt found five companies that steadily increased their production and reserves. These companies are trading at dirt-cheap valuations. When oil prices stabilize, Matt believes these five companies will soar higher.
He's not buying these stocks yet. But we'll let you know when he says to pull the trigger. In the meantime, Stansberry Resource Report subscribers can access Matt's new report titled "A Rare Chance to Get America's Best Oil Companies at a Big Discount" by clicking here.
As we said above, it's difficult to guess the short-term price movements of individual commodities... Even though we know coal will increase in price, we don't know if that will happen tomorrow or in two years. And oil prices could continue to stay depressed.
That's why our favorite way to play commodities today is diversified across a handful of commodities – including coal, uranium, potash, and gold. As commodities prices rebound, this company will make a fortune – as will most other firms capable of withstanding the cyclical busts.
But that's not why we're so bullish on this company.
It recently completed a deal that will pay huge royalties in the future... According to Extreme Value editor Dan Ferris, the deal will boost its revenue 10-fold. And Dan is "100% certain" the company will start paying a "substantial" dividend in the next couple years... He thinks it will be a double-digit yield based on today's share price.
This stock is cheap today... Dan says it's one of the best opportunities he has ever seen in the natural resource sector.
And as sophisticated investors look for low-risk, high-reward ways to profit from commodities, this little-known stock is sure to pop up on their radars.
The company has three major tailwinds: We're nearing the bottom of the commodity cycle. It just completed a huge deal that will cause earnings to soar. And it's likely going to start paying a big dividend.
In short, this stock won't stay cheap for long. To learn more about our favorite way to profit from natural resources today, click here.
New 52-week highs (as of 11/24/14): Apple ( A subscriber comments on yesterday's mailbag on commercial real estate... and another discusses the indicator flashing red for him. Send your e-mails to feedback@stansberryresearch.com.
"Timothy's analysis ignores the dynamics of supply and demand as well as inflation. There is absolutely nothing wrong with interest only loans, only with owners deceiving themselves over what constitutes profitability. Rents as a rule are going up over time, unless your property is in a decaying city like Detroit. A building's value is measured in GRMs and "Well guys, I think this could be the end of the bull run. This morning my wife, who knows nothing about the markets, mentioned that maybe we should buy stocks. She had just heard some talking head say that there are another 14 years to go in this bull market. 6 months ago it was the exact opposite where she thought we should sell everything based on some other talking head saying the bull market is over. Maybe we can cross check with Jeff Clark's mom!" – Paid-up subscriber Matt C
Regards,
Sean Goldsmith
November 25, 2014
