Sunday, July 8

Week 53 - Commodity Producers in the S&P 100 Index

Situation: We’ve discussed commodity-related companies in broad strokes in a number of previous blogs (see Weeks 10, 20, 26, 34, 35, 40, 42, 45). In terms of Finance Value (Reward minus Risk) and prospective future reward vs. risk only 4 companies, Exxon Mobil (XOM), Chevron (CVX), Occidental Petroleum (OXY) and Hormel Foods (HRL) stand out. All 4 are already on our ITR Master List (see Week 52) of stocks recommended for DRIP investing. In this week's blog, we’ll try to determine which commodity producers have a chance to meet the qualifications for our Master List in the next few years. Given that risks relating to debt and cash flow tend to diminish as a company grows larger, and given that this blog is for risk-averse investors, we’ll begin our analysis with the largest companies which are also commodity producers, i.e., those found in the S&P 100 Index.

The accompanying Table lists 15 such commodity producers found in the S&P 100 Index. There are 12 petroleum-related companies, including 9 drillers (OXY, APC, CVX, APA, XOM, SLB, NOV, COP and BHI) and a pipeline company (WMB). There are also 2 that produce commodity chemicals (DD, DOW). There is only one mining company, Freeport-McMoRan (FCX), which produces copper, gold, and molybdenum. Monsanto (MON) produces genetically-engineered seeds and growth supplements for agriculture. Caterpillar (CAT) produces mining equipment as well as equipment used in agriculture and drilling. Three of the 15 are already on our ITR Master List (XOM, CVX and OXY), so we’ll sift through the remaining 12 companies looking for any that might to be able to join the Master List within the next 5-6 yrs. We see that one, MON, is almost ready. It only needs to increase its dividend yield from the current 1.5% up to the yield on the S&P 500 Index (currently 2.1%). Apache (APA) is attractive in most respects but would have to increase its dividend annually for another 8-9 yrs to qualify. 

Bottom Line: We like to invest in commodity producers because commodity prices usually keep up with both inflation and population growth. However, these companies have high fixed costs and long lead-times before investments pay off. There is often a sharp fall-off in revenues during recessions, the effect of which is compounded by the inability to raise prices. So you have to do a lot of research before buying stock in a commodity producer and have a lot of patience during recessions, before benefiting from their outperformance over time. Of the 15 commodity producers in the S&P 100 Index, only 4 appear to be suitable for a risk-averse portfolio of long-term investments: ExxonMobil, Chevron, Occidental Petroleum, and Monsanto.

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