EEconomic downturns usually mean lower demand for energy and industrial inputs like copper, steel and iron ore. However, as the world continues to industrialize, the demand for these commodities is expected to continue to increase. Therefore, the recent decline in commodity prices could present a buying opportunity for long-term investors.
The energy sector is down more than 20% from its 52-week high, while gold is down 16% from its 52-week high, and the S&P 500 GSCI Copper Indexwhich tracks the copper industry, is down 30% from its 52-week high. Chevron (NYSE: CVX)the iShares Gold Trust (NYSEMKT:IAU)and Freeport-McMoRan (NYSE:FCX) three different ways to invest in energy, gold and copper. Here’s what makes each stock a great buy now.
The Oracle of Omaha sees the benefits of this oil supermajor
Scott Levin (Chevron): While markets showed signs of rebounding this week, many high-quality tickers failed to recover. This left investors with the option of picking up quality stocks at a discount – stocks like Chevron. Warren Buffett, for example, recognized the opportunity to pick up Chevron for sale. In a recent regulatory filing, Berkshire Hathaway reported that he purchased nearly 121 million shares of Chevron in the first quarter of 2022.
Investors today might not be able to pick up Chevron’s stock at as low a price as Berkshire Hathaway last quarter, but that doesn’t mean they missed the boat. Currently, the stock is trading at 8.5 times operating cash flow, a more attractive price given 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 top position anytime soon. One business that will significantly benefit the company, for example, is its growing business in the Permian Basin. In fact, management expects oil production in the Permian to help the company generate more than $4 billion in free cash flow in 2026. In some context, Chevron reported overall free cash flow of $21 billion in 2021.
Clearly, Chevron generates a lot of money and, fortunately for its investors, the company has been generous in returning that money as a dividend, which it has been doing for a long time. Like a Dividend AristocratChevron has a reputation for rewarding its shareholders, making it — and its 3.9% yielding stock — a worthy consideration for veteran and new investors alike.
The best way to invest in gold now
Daniel Foelber (iShares Gold Trust): Gold is often considered a low risk, low return investment. With a mix of practical applications, industrial use cases, and as an input into jewelry and other luxury goods, gold has good utility. It also has a history that lasts far longer than any fiat currency and is older than most countries. It gives or a level of credibility and reliability unmatched by any company and arguably any asset.
Yet many investors know that gold has long underperformed the broader US stock market. Unlike a business, the price of gold 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 US dollar. A strong US 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 to some investors than gold, which has no yield.
But gold is undeniably a great asset when the global economy weakens or belief in fiat currencies begins to wane. Therefore, the sell-off in gold could be a good time for investors to consider adding some yellow to a diversified portfolio. There are several ways to do this. The basic three are either by buying physical gold, which pays a premium above the market and comes with a host of security and storage risks. Or buy a gold mining stock. Or my favorite, just buy a gold exchange traded fund.
The iShares Gold Trust is the second largest gold ETF by market capitalization. It has a low spend rate at just 0.25%. It also has 503 tonnes of gold insured and safely stored. The ETF offers a way to virtually invest in this trust. Gold will likely continue to underperform the US 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 pickaxe of copper miners
Lee Samaha (Freeport-McMoRan): If you are looking to bounce the price of copper, look no further than Freeport-McMoRan. Clearly, buying Freeport shares is a vote of confidence in a recovery in the price of copper from the selloff of the past two months. However, it is also an acknowledgment that Freeport is the best positioned major copper miner in the market. This is because Freeport has major expansion plans in Indonesia and the United States, and relatively less exposure to countries like Chile and Peru, which carry more political risk.
Additionally, it should be noted that even after the sharp drop in the price of copper (from around $4.80 per pound in mid-April to around $3.30 per pound at the time of this writing), Freeport is always very profitable. In fact, according to management during the second quarter earnings call, Freeport would generate at least $6 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) on average in 2023/2024 even with a copper price of $3 per pound. Given that its market capitalization is only $41.4 billion, that makes it a good value.
Thus, Freeport-McMoRan stands well benefit from any rise in copper prices due to continued economic demand, especially in the context of the electrification trend and growth of electric vehicles and renewable energies.
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Daniel Foelber has positions in iShares COMEX Gold Trust and has the following options: Short calls $35 in October 2022 on iShares COMEX Gold Trust. Lee Samaha has no position in the stocks mentioned. Scott Levin has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.