Time to buy resource stocks again?

Resources to start Rockin’ Again? I think so. A year or two before the resources fund I launched (long gone now) would start a steady climb towards the #1 spot in those performance charts, the mood was just like it is today.

Although demand from China and other developing countries is not nearly as new a story as when I published my first book “Resources Rock,” much of the same advice I provided in 2004 is still relevant today. The supply of many commodities is limited, and demand is growing. I suggested earlier in the year that optimism about the sector was overblown, and I was right. As always happens in stock markets, occasionally the opposite occurs. Much like the theme of my current book (A Maverick Investor’s Guidebook), I recommended in the 2004 book about resources that the best time to buy the stocks, is when nobody wants them. It’s even better if there’s a good chance demand for the underlying commodities might improve.

Surprise (again, as I said would happen in prior blogs): The U.S. economy is struggling to get better…and succeeding.

“U.S. industrial production more than doubled expectations in July with its 0.9% jump. And to put the cherry on top, May and June’s moves were revised up……the former to a “+” from a negative, and June’s 0.2% increase was bumped up to 0.4%.”

For the resources sector though, we also need global industrial production to regain its footing. There may not be evidence of this yet, but panic concerning European debt has caused the market to believe growth will more likely slow than get better. Expectations drive stock prices, and if Europe slumps and demand for commodities slumps…so what?

That scenario seems to have already been priced into the stocks. BUT if the U.S. recovery and China’s (now the world’s biggest buyer of resources) economic growth are enough to bolster global demand for commodities, then the stocks should rebound nicely indeed.

I like to keep things relatively simple (because I’m simple-minded). If we look at a stock like Teck Resources Limited, it has declined by about 30% during this correction we’ve suffered whereas the price of copper for instance is down roughly 10% (ignoring coal, gold and other stuff the company produces).

Don’t get me wrong, we might see the shares come down another 18% from the current level should expectations deteriorate further. Stocks in this sector move fast (as you can see from the Teck’s stock chart), but if the consensus turns out to be a bit too pessimistic and we see global demand resume – there won’t be time enough to buy the stock if it heads skyward. This I’ve learned from decades of experience.

Commodity prices (and labour) are costs of production, and it makes little sense to grow production unprofitably. Back in June of this year, I said in a commentary: “The price of crude (and gasoline) should be lower, and to bet against this right now in my opinion is just not prudent.” WTI crude dropped from $100 when I wrote that and hit a low of $80 already this month. I certainly haven’t felt any relief at the pump, so I’m undecided if we’ve seen the bottom in energy pricing. However, the decline overall in commodity prices might be sufficient to ignite some demand.

JOC Industrial Commodity Price Index

For the record, I’ve been dead wrong about gold, but then I’ve been dead wrong about many things over the years. At nearly $1800 an ounce, I’m gonna locate the gold teeth my dentist removed and take them to one of those guys who advertise on TV that: “We BUY GOLD!” I’ll use the money to buy some uranium, moly, copper, and iron ore stocks…..oh and definitely some Canadian banks and insurance company stocks now having 5% dividend yields.

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About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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