Disclosure: The following represents my opinions only. I am long AAV.TO, ARX.TO, ATU.V, BIR.TO, CMMC.TO, TAO.V, TOU.TO, and YGR.TO (Image credit to Amol Tyagi on Unsplash)
With a textbook correction in a lot of energy and materials stocks now complete (knock on wood), I’ve been looking around for opportunities in new and old names alike. Stocks like Arc Resources (ARX.TO, last at $9.01) and Copper Mountain (CMMC.TO, last at $3.26) had pretty much straight-line corrections to their 200 day moving averages, even piercing them briefly, with RSI levels getting into the mid-to-low 20’s in the process… and I could say the same about a lot of names in the resource sector. For now, those recent lows are the levels that I’ll keep an eye on in the weeks and months ahead, since they “should” set the low water mark if the primary uptrends of these sectors/stocks are to remain intact. During their corrections, a lot of resource stocks went from what I would consider “low fair value” to something more resembling “cheap”. That’s what market digestion/consolidation feels like — the idea is that it creates good entry points for new money as early big-gainers take profits, thus setting the stage for the next leg higher as long as market winds are still favourable. With that in mind, I think it makes sense from a fundamental standpoint (in terms of trading multiples/free cash flow yields) that support came into the resource stocks where it did. Now it’s all about the road ahead and the market’s view on monetary policy, government policy, and the economy. Tapering of the Fed’s insatiable asset purchasing program is a given at this point, but now all eyes are on interest rates. Powell has signalled that the timing of liftoff for interest rates will be subject to more stringent tests, so as not to repeat past mistakes of moving too soon. For now, that means that market interest appears to be back for commodities, and maybe even gold, going into Q4.
I can’t predict the prices of copper or oil any better than the next guy, but both appear to have underlying dynamics that suggest to me that neither commodity is in a short-term spike. For copper, it’s the electrification/green energy theme, while for oil, it’s the mantra of asset divestiture by the majors, debt repayment, share buybacks, and return of capital to shareholders — as opposed to production growth at all costs. It’s been so long since there has been relatively broad interest in commodities that it’s almost hard to remember what it feels like when things really get rolling… and while there was a nice wake-up-and-smell-the-coffee run in the energy and mining stocks, I’ve yet to see any signs of sector euphoria, with a large swath of, liquid, free-cash-flowing businesses trading at rock-bottom multiples (and very high free cash flow yields) relative to their historical ranges. In a nutshell, I smell value out there, so as long as copper and oil prices don’t implode, I think I’m good to play in the commodity sandbox with an eye towards quality and special situations. Lithium, nickel, and uranium are all on the list of “things I still want to have exposure to” and I’m sticking with the same names as I have before.