4 commodity stocks to consider ahead of QE3

If more quantitative easing comes to pass, these stocks might be ideally positioned.

By Stock Traders Daily Jun 13, 2012 2:02PM

Image: Combines in field (© Mark Karrass/Corbis/Corbis)By Stock Traders Daily

 

Quantitative easing, in some form, is on the way and it may be "announced" as early as next week. In fact, it can be argued that the main reason why the stock market hasn't sold off more than it has over the past few weeks is because of this expectation for more monetary stimulus.

 

We have already seen how the markets react in anticipation of expiring QE programs, and the latest round -- known as Operation Twist -- is set to conclude at the end of this month. All eyes will be focused on the next FOMC policy-setting meeting slated for June 19-20, with many expecting the Fed to announce some form of monetary stimulus -- perhaps an extension of Operation Twist, or another round of QE.


We also know that the table has been set for more action. Last week, Fed Vice Chair Janet Yellen explicitly laid out the case for more monetary stimulus, stating that she saw risks in housing, the job market, and that there is significant downside risk to the economy. On June 11, Chicago Fed President Charlie Evans commented that he favors additional accommodation, including further asset purchases. In other words, he supports QE3.


As we heard during Ben Bernanke's testimony to Congress last week, the Fed Chairman put the ball in Congress' court, asking them to do something to avoid the fiscal cliff. But, the Chairman is also wise enough to know that Congress won't do anything until they are forced to. Therefore, his comment that the Fed "stands ready to act" is likely to come to fruition here shortly. This should set the stage for a near-term rally for the SPDR S&P 500 ETF (SPY).

 

However, Bernanke also warned about the diminishing effects of QE, and there is also nothing the Fed can do about the falling amount of new investment dollars available, which will greatly decrease demand for stocks, real estate, business investments, etc. This is the primary thesis behind the investment rate, which has proven to be one of the most accurate long-term economic and stock market predictors in history. To learn more about the investment rate, click here.

 

With monetary stimulus most likely on the way, investors and traders should position their portfolios to take advantage of this action. As many are aware, commodity-based stocks are ideally positioned for this environment because one of the net effects of QE is that the dollar is devalued, causing inflation for commodities to ramp higher. Considering that I expect the rally in stocks to be more short-lived this time around, due to both the ongoing macro/political risks, the diminishing effects of QE, and from what the investment rate tells me, I also wanted to highlight commodity stocks that pay healthy dividends. Here are a few to consider.

 

CVR Partners (UAN) is a limited partnership formed by CVR Energy to own, operate, and grow its fertilizer business. It is also a recent IPO, going public back on April 8, 2011. The company derives most of its revenue from the sale of nitrogen fertilizers, mainly to the agriculture market. Essentially, UAN is a "commodity super cycle play," with the premise being that food costs are likely to go higher as global population expands and available farming acreage decreases.  UAN is also completing a significant expansion project that it expects will increase production by 400,000 tons. UAN has a high dividend yield of 9.6%.

 

Vale S.A. (VALE) is a Brazil-based company that is involved with exploring and producing a variety of basic materials, such as iron ore (~92% of EBITDA), copper and fertilizers. The stock has been battered this year as iron ore shipments and prices have declined, principally due to the slowdown of infrastructure projects in China. But, the stock appears to have found support at the $18 level and is now trading with a trailing price to earnings multiple of about 6 times. Furthermore, the drop in the stock has pushed its yield to very attractive levels, currently sitting at about 6%. The argument for this stock isn't necessarily that its growth prospects look great; it's that it appears the stock has found a floor and that a fresh round of QE could be a catalyst for shares in the near-term as the commodity space in whole would see a lift. Put another way, "a rising tide lifts all boats."

 

Kinder Morgan Energy Partners (KMP) is another stock that has been under pressure over the past few months, primarily due to falling crude oil prices. The company owns and operates pipeline transportation lines and storage facilities for gasoline, diesel fuel, and natural gas. Although Bernanke has denied it in the past, one of the negative impacts of QE is that oil prices move higher, due to the devaluing of the dollar. This is a positive for oil transport companies like KMP, as they can charge higher fees to their oil and gas producing customers. The recent slide in shares has also created a hefty dividend yield, as shares currently provide a 6.3% yield.

 

Lastly, DuPont (DD) is a highly-diversified, steady company whose stock currently yields about 3.5%. Its exposure to the commodity space comes from its agriculture segment, which provides corn and soybean seeds, as well as grains, herbicides, and insecticides. DD also has a very reasonable valuation, trading with a forward price-to-earnings multiple around 10 times.

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