Buy Hold Sell: 5 stocks to play the commodities squeeze

Despite the recent sell-off in resources and materials stocks that we have witnessed over the past few weeks, investors with a penchant for miners, explorers and energy companies would be feeling pretty chuffed (comparatively, that is - let's observe a moment of silence for growth investors). 

Potash prices, for example, have lifted nearly 178% over the 12 months to the end of May, while coal has lifted 176% over the past year. Meanwhile, gasoline's up nearly 65% over the past 12 months... As many of us are well aware. 

And while it's easy to panic as markets are selling off, take profits, and run, in this episode, you'll see that our fundies are going against the curve and adding a few stocks to their shopping carts. 

Livewire's James Marlay was joined by two "rock stars" - Ausbil's Luke Smith and Paradice Investment Management's Tom Richardson for their thoughts on three stocks investors can use to play the commodities squeeze. 

Plus, they also name one sector and one stock that looks compelling over the long term.  

Note: This episode was recorded on the 22nd of June 2022. You can watch the video, listen to the podcast, or read the transcript below.

Edited Transcript  

James Marley: Welcome to Buy Hold Sell, brought to you by Livewire Markets. My name's James Marley. Today we're talking about stocks to play the squeeze in some of the commodities going around. What we've seen is a lack of investment in new supply, combined with increasing and surging demand. It's put a bit of a squeeze on some of the commodity prices. So we're going to talk with a couple of commodity experts, Luke Smith from Ausbil and Tom Richardson from Paradice, to find out where the opportunities might be. 

Let's start with Potash, a bit of a unique commodity from a fertiliser perspective. Not too many pure-player ways to play it. BHP's got a big project. Buy, hold, or sell?

BHP (ASX:BHP)

Luke Smith (BUY): Yeah, it wouldn't be the first commodity I'd think of when I talk about BHP. But they do have a major project that they've invested in. BHP, from our perspective, is a buy. It's more a buy with what's happening in the near term. China was slow through the course of the first half, likely significant pent-up demand and acceleration activity in the second half in terms of the stimulus. What does that mean? It's positive for construction-related commodities. Sorry, I'm not answering your question, but I am. So what does that mean? It's positive for all I know, and therefore it's positive for BHP from our perspective.

James Marley: Tom, BHP. Buy, hold, or sell?

Tom Richardson (BUY): BHP is a buy for us. Boring is beautiful. In terms of Potash, absolutely agree. 20% of the world's potash comes from Russia and 20% was from Belarus. So BHP does have Jansen potash, which they haven't been able to invest in because shareholders wanted their money back for the last five years. They probably wish they'd invested that a little bit sooner. But I agree with Luke. The second half looks well supported from China's economic stimulus and BHP's spewing a lot of cash, and they're going to give it all back to investors. So I think boring is beautiful and BHP's a buy.

Whitehaven Coal (ASX: WHC)

James Marley: Okay, let's talk about something that's old, not that beautiful, but has driven an incredible share price return, Whitehaven coal. Buy, hold, or sell?

Tom Richardson (HOLD): I have to put it on a hold for me. I'm just a little bit worried this is as good as it gets. I mean, they're generating so much cash. The only worry for me is if I look at the China price versus the ex-China price, there's obviously a huge gap that has emerged as the West realises that they need coal. So how sustainable is that? Maybe I've got to question it, but just a hold for me there, James.

James Marley: Okay. Whitehaven, it is spewing out huge amounts of cash. Buy, hold, or sell?

Luke Smith (HOLD): It is definitely, but I'd agree with Tom, it's a hold from my perspective. Clearly, we're in the middle of a global energy crisis. That goes without saying. And thermal coal, especially premium thermal coal that Whitehaven produces, is in shortage. And we can see that in terms of pricing, being six to eight times where the pricing of thermal coal has been historically. But from our perspective, just a little concerned about how it unfolds over the medium term. Clearly, a commodity structurally challenged longer term, it's needed in this transition period. But from our perspective, the stocks a hold.

Sandfire Resources (ASX: SFR)

James Marley: Okay. Let's switch to copper. My understanding is that the long-term outlook for copper, it's starting to look like it could tighten up. We've got a stock I'm talking about today is Sandfire. Buy, hold, or sell?

Luke Smith (BUY): It's a buy for us. We like copper. Our view on copper is a GDP plus style commodity, which benefits again from this acceleration within China in the second half. You throw in decarbonization, the electrification of things, that all feeds into demand for incremental amounts of copper. Sandfire is a great way to play that from our perspective. It did a transaction with an asset called Matsa recently. We're of the view that that asset will grow significantly over time, and ultimately that's one of the underlying driving forces for Sandfire in general.

James Marley: Okay. Are you a bull on copper and Sandfire? Buy, hold, or sell?

Tom Richardson (SELL): I'm going to say sell for Sandfire. And I think short-term, copper might do a little bit tougher. The longer term looks good. In terms of Matsa, it looks like a pretty good asset, but I think the company probably paid fair to full to maybe a little bit over on a short-term basis. And then they're obviously developing an asset in Botswana as well. And from a personal perspective, I've had my fingers burnt in African copper miners over the last 10 years, so I'm a little bit cautious on that one. So I'll just have to say sell for Sandfire here.

James Marley: Okay. All right. Well, Tom, let's talk about a commodity that you think where the supply and demand outlook looks really favourable and your favourite stock to play.

Phosphate: Incitec Pivot (ASX: IPL)

Tom Richardson (BUY): Yeah, I think the fertiliser market looks really interesting, and in particular within that, the phosphate market. There are huge supply disruptions from the Russian invasion of Ukraine. And then if you think about phosphate, it goes into electric vehicles in the lithium iron phosphate battery. So it's only a very small amount of phosphate goes into, but there's no real supply of phosphates around, so that incremental demand could actually put this market into structural deficits. There's no new supply. So Incitec has a plant up in Queensland. They're doing maintenance, so touch water it can start. And we think they're going to make a lot of money in the next few in that asset.

James Marley: Okay, Luke, you got a commodity that you think the setup looks really sweet and you got to stock to play it?

Battery Materials: IGO (ASX: IGO)

Luke Smith (BUY): Yeah, I might tag off the battery discussion that Tom just highlighted there, or maybe a company that might have some exposure to batteries rather than IPL. I'd call out a company that's a one-stop shop for commodities that are actually exposed to batteries, and that's IGO. Nickel and lithium, it picked up a tier one asset at the lows of the cycle a number of years ago-

James Marley: I saw someone describe that deal as the deal of the decade.

Luke Smith (BUY): Yeah. It was impressive. They picked the eyes out of it, is what we'd say. They're very inquisitive and looking to build out nickel as well. And like I said, nickel and lithium may be more influenced by what's playing out within the EV space, which, like I highlighted, battery materials, we're very positive on the outlook, regardless of where sentiment is within this space at the moment and see demand accelerating, and that's a great way to get exposure to that.

James Marley: Okay. Well, I hope you enjoyed that episode of Buy Hold Sell. It's great to do a special feature on the commodity cycle and some of the commodities that have got a good outlook. If you enjoyed the show, give the Wire a like and hit subscribe on the YouTube channel. We're bringing you fresh content every week.

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