The new year looks like it will kick off with some serious extremes in some very stressed markets. Commodities in general, and oil particularly, have been taken to the woodshed in a way not seen since the 2008 financial crisis.
The adage “buy low, sell high” sounds simple enough, but in practice is a very difficult thing to actually pull off. When stocks are low, the natural inclination is to stay away and let someone else pick the bottom. That makes the buy low part very difficult. When they’re high, people want to pile in and catch the rest of the ride, and the higher they go the more bullish investors tend to get. That makes selling high equally tricky. To both buy low and sell high takes a lot of nerve.
In this 247 Wall St. series, we will focus on four stocks to buy and hold for 2016, each group of four in a different sector. The first focus will be commodity stocks. It is in these times of extreme stress that the commodity complex is now experiencing when buying low becomes possible. For those brave enough to pull the trigger and hold on for 2016, good commodity stocks are at basement prices.
Unlike many of its peers, Exxon Mobil Corp. (NYSE: XOM) has taken the collapse in oil prices in stride. It is still making between $4 billion and $5 billion per quarter in 2015 without any significant cutbacks. Chevron Corp. (NYSE: CVX), though also a decent pick, has been struggling a bit more with the current environment, posting an operating loss in the second quarter of $2.16 billion. Chevron also has been cutting back on future projects and production, meaning it will not be in a position to fully capitalize like Exxon will once oil markets rebound. Think of Exxon as the OPEC of American oil companies. It can produce as much oil as it wants at a profit regardless of price, live on a little less and still come out on top.
Once oil recovers, likely at some point in 2016, Exxon will lead the sector higher.
Potash Corp. of Saskatchewan Inc. (NYSE: POT) is Exxon’s parallel in the mining space. Though certainly not as big, and Potash has cut back production lately in response to falling mineral prices, it is in fairly good shape for a company in an industry in free fall. Skirting lows not seen since February 2007, the stock offers great value as a dividend play, currently yielding 8.8%. The company is still pulling a consistent profit, though smaller than it used to, but that says a lot in the current environment. The main drawback is that the high dividend may be cut if basic materials prices don’t rebound soon, because Potash is paying nearly its entire bottom line to shareholders. Even if it is cut in half, it’s still a good yield.
The balance sheet is also relatively healthy, with a moderate amount of leverage, about 30% of market cap. If Potash is this healthy in times of stress, imagine how it can perform when prices rise.