Stocks have been on a rally for some time now, although some indicators point to a lack of conviction. Volume is low, even by summer's standards, and much of the buying is from those who were on the sidelines and are just getting back into the game.
We are also seeing another commodities rally. Items like oil, crops, and metals are often used to hedge against inflation. They also gain ground on economic optimism.
The dollar continues to weaken, which is driving prices higher for crude, natural gas, and other futures. Natural gas surged 15% on Thursday, oil remains above $72, and gold has pushed its way passed the $1,000 mark. The yellow metal has yet to close in 4-digit territory, but putting pressure on it is enough to show that gold, not cash, is king.
On the other hand, we are seeing more bullish sentiment every day. The Fed is projecting modest growth for the current quarter which would put an official end to the worst recession in most of our lifetimes.
So What is Really Fueling the Rally?
My opinion? It doesn't matter. You can find numerous articles that talk about the justification and rising projections for commodities, but the bottom line is they are up and most see the trend continuing.
Capitalizing on the move can be difficult, but using the Zacks Rank as a guide, it becomes much easier. Below are a few stocks in various areas that could reap the benefits of rising commodities.
Hot Commodities
Arena Resources Inc (ARD) acquires, explores, develops, and produces oil and natural gas in the south-central states of the U.S. The company's current reserve is estimated to be nearly 66 million barrels of oil equivalents.
Arena released second-quarter results on Aug 7 that included revenues of nearly $28 million, down sharply from last year. While production was down just 2%, net income was well below last year's levels of $24.8 million, 67 cents. Earnings for this quarter came in at $14.4 million, or 20 cents per share, for the company's sixth consecutive earnings surprise as the consensuses was 19 cents.
Following the report, 7 of 9 analysts polled by Zacks have raised full-year estimates. The average for next year is now $1.02, up from 76 cents. Next year's estimates average $1.55, up from $1.09 in the same time frame.
Walter Energy Inc. (WLT) produces and exports coal for the steel industry. In addition the company supplies coal bed methane gas, industrial and steam coal, and metallurgical coke. On a side note they also have a home building and financing segment that is classified as discontinued operations.
Analysts have been quick to raise forecasts. The Zacks Consensus Estimate for full-year 2009 is now $2.43, up from $1.77 prior to the report. Estimates for 2010 are averaging $5.01, up from $3.19.
While the growth for this year is expected to drop off about 41%, it should rebound sharply next year to the tune of 106%.
EV Energy Partners (EVEP) is a Master LP that acquires and operates oil and gas properties. Fields are located in Ohio, West Virginia, and Louisiana.
the Zacks Consensus Estimate for full-year 2009 jumped 20 cents to $2.36. This represents a growth rate of over 500%. Next year's estimates are averaging $2.21, a 7% decline.
EVEP is the top rated domestic exploration and production company. The partnership boasts an excellent debt to equity ratio of just 0.7 compared the industry average of 37. EVEP also operates with a net profit margin of 229%. Its ROE, 26%, is about 5 times higher than its peers' average of 5.5%.
In Closing
While opinions as to why will vary, one thing is almost unanimous; commodities are expected to rise. So do yourself a favor and get on board using the Zacks Rank and the Research Wizard can give you the accuracy you need to discover the best commodity plays.
