These companies keep defying expectations
- These are the best commodity stocks to buy now for the core portfolio.
- Albemarle Corporation (ALB): Aggressive capacity expansion and healthy cash flows.
- Rio Tinto (RIO): Investment grade balance sheet and focus on the decarbonisation theme.
- Freeport-McMoRan (FCX): Steady copper sales visibility and likely benefit from higher price realization.
In might seem to be an inappropriate time to talk about commodities. The global economy is on the brink of a recession and the financial sector is already facing challenges. However, I believe that it’s a good time to accumulate some of the best commodity stocks.
The first reason is that the demand for specific commodities will remain high in the coming decade. I am referring to the global focus on clean energy and decarbonisation.
Another reason to be bullish is the possibility of a sharp recession. This might sound confusing. Let me elaborate. In a recession scenario, central banks will turn to expansionary policies.
Further, governments are likely to consider stimulus packages to boost economic activity. Both these scenarios will be positive for industrial commodities.
Let’s therefore talk about three of the best commodity stocks to buy for 2023 and for the long term.
Albemarle Corporation (ALB)
It’s likely that the demand for lithium will continue to increase in the coming decade.
Reports show that the lithium supply gap will be at least 1.1 million metric tons by 2035. Lithium is therefore one commodity that’s likely to remain in an uptrend.
Albemarle Corporation (NYSE:ALB) is possibly one of the best stocks for exposure to lithium. The company is on a high growth trajectory as it aggressively expands its lithium conversion capacity.
With attractive price realization, the business is also a cash flow machine. For the current year, Albemarle has guided for operating cash flow of $2.2 billion.
Albemarle ended 2022 with lithium conversion capacity of 200ktpa. The company expects to boost capacity to 550ktpa (mid-range of guidance) by 2027. Cash flows will be deployed for expansion besides value creation for investors through dividends.
Overall, ALB stock is among the best commodity stocks to buy at a forward price-earnings ratio of 7.5. I would not be surprised if the stock doubles in the next 24 months.
Rio Tinto (RIO)
Rio Tinto (NYSE:RIO) is another undervalued commodity stock that seems poised for a reversal rally.
At a forward P/E of 8.9 and a dividend yield of 7.36%, the stock is worth holding in the core portfolio.
An important reason to like Rio Tinto is strong fundamentals. The company has an investment grade balance sheet and reported free cash flow of $9 billion in 2022. Healthy cash flows will ensure that dividends sustain.
The balance sheet healthy gives the company scope to make big investments. Between 2023 and 2025, Rio Tinto expects to invest $27 billion. These investments will ensure steady growth and continued strength in cash flows.
The iron ore segment is the cash flow driver. However, Rio Tinto is focused on asset decarbonisation. This includes investment in assets related to lithium, copper, among others.
As an example, the company will be the largest source of lithium supply in Europe for at least the next 15 years.
Freeport-McMoRan (NYSE:FCX) stock has been in an uptrend in the last six months. During this period, the stock has rallied by 47%. I expect the bullish momentum to sustain for copper play.
Be it infrastructure development in emerging markets or focus on green energy, demand for copper is likely to remain high. I therefore consider FCX stock as one of the long-term portfolio stocks from the commodities space.
Specific to Freeport, the company has deleveraged in the last few years and ended 2022 with a net debt position of $1.3 billion. The company has ample flexibility for exploration activities to boost its reserve base.
It’s worth noting that Freeport expects annual copper sales at 4.2 billion lbs through 2025. Even with steady sales, higher price realization can boost free cash flows.
From the perspective of shareholder value creation, Freeport returned $2.2 billion to investors in 2022 as compared to $800 million in 2021. Based on price realization, I expect dividend growth in the next few years.
This post originally appeared at InvestorPlace.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.