What to Do about Commodity Stocks

Commodity stocks around the world have taken a serious beating. A slowdown in China, a major consumer of commodities, is blamed to be the underlying cause. Added to this is the soaring crude-oil supplies, which have sent the oil prices at multi-year lows. Experts and analysts are asking you to stay away from commodity stocks till the “cycle” reverses.

Commodity companies, companies that manufacture metals and oil and gas, are termed “cyclicals”— maybe because their prices move up and down in a cyclical fashion. So experts say that the right way to invest in such companies is to ride them during an uptrend and dismount from them (or stay away from them) during a downtrend.    

I don't know anything about cycles. Nor do I recommend following them. However, what I do know is that many commodity stocks are currently trading at throwaway prices. Don't go by valuations as they could be misleading. Since earnings have been down for many commodity companies, they will be trading at either high price-to-earnings (P/Es) valuations or no P/Es (which means they are currently in loss).

It won't be a bad idea to take small exposures to the leaders of the sector. By “leaders” I mean the biggest companies in the sector. Don't buy for the full amount; buy in stages. As and when a turnaround happens, you will see their stock prices racing up. Don't wait for the bottom. No one knows when the bottom will arrive. The financial community may be looking at the cycle, but what I can tell you for sure is even when the cycle changes, it will still be looking at it for “clearer” signals. The stock market can move really fast and that too before any recovery is in sight. Your best bet is to pick the beaten stocks when they are writhing in pain, not when everyone else also gets into the buying mode.