It seems that the only growth stocks out there in this market are related to natural resources (i.e. gold, silver, oil, corn). We might only be halfway through the current commodity price cycle and, even if you don’t much believe in it, you can’t argue with the price performance of a lot of commodity-related stocks. It’s the hottest area of the equity market and it’s going to stay that way for a while.
You know you’re in a sectoral bull market when both micro-cap stocks and large-cap stocks within the group are moving together. We’re getting this price action more so in the gold sector. The oil business continues to see some of the best stock market performances from large-cap integrated producers.
Consider one of my favorite oil stocks, ConocoPhillips (NYSE/COP). This $117-billion stock market darling keeps hitting new record highs and it isn’t even expensively priced. And the stock pays a great dividend. Big oil is highly likely to destroy first-quarter consensus estimates and these stocks should continue to be very strong performers throughout the year.
In the gold mining business, Barrick Gold Corporation (NYSE/ABX) is the biggest out there and this $54.0-billion giant has a stock price that’s trading right at its all-time record high. This large-cap producer also pays a dividend to shareholders, although it’s not as big as COP.
Individual investors love stock picking in the micro-cap sector of the market, but when you have such a pronounced economic trend like the current commodity price cycle, you can usually do just as well owning large-caps. COP and ABX illustrate this point. And you can sleep a lot better. In fact, in the current commodity price cycle, you don’t even have to bother with individual stock picking at all. If the underlying commodities keep going up in price, you can get most of the returns by just owning a benchmark index or an exchange-traded fund (ETF).
Getting back to the issue of growth… The domestic economy is recovering, but it’s doing so in a choppy manner. Without easy money from the Federal Reserve, the current situation would be a lot worse. A good reason why commodities are going up in value is the weakening U.S. dollar. The policy to debase the dollar and reflate the economy is a major reason why the commodity price cycle has a lot further to run. I personally don’t see the U.S. economy accelerating strongly over the next several years, so if you want to find growth as an investor, you’re going to have to go with commodities.
The great thing about the commodity story is that, for the most part, the world can’t produce enough commodities to satisfy demand from faster-growing developing nations. As countries like China, India and Brazil slowly create a middle class, the demand for gold, silver, oil, corn and wheat will only get stronger. This wealth demographic is a trend that I don’t want to miss.