Investing in commodity stocks may be as Canadian as maple syrup, but thanks to volatility, the results aren’t always as sweet. David Picton, president and portfolio manager for Canadian equities at Picton Mahoney Asset Management in Toronto, identifies trends that could help investors make better commodity picks.
“Canadian commodity stocks form a large part of the Canadian benchmark, though less so than in years prior, especially in the mining-related sectors where most [Canadian] companies have been consolidated into much larger behemoths around the world,” he says.
As a result, Picton looks to benefit from both broader commodity trends and company-specific changes, saying he likes stocks “where supply and demand dynamics are improving, where cap-ex has been constrained over time, and where companies have gone about their business to improve […] operations.”
Copper and zinc stocks fit the bill. They’re “poised to have a better recovery process,” says Picton, whose firm is one of three managers of the Renaissance Canadian Growth Fund. “They have done the bulk of their cap-ex from yesteryear, [and] excess supply has dwindled from the system. In zinc, in fact, we’re approaching more deficit positions at a more aggressive rate than a lot of people thought.”
Oil exhibits a different dynamic, indicated by “the decline in cost of producing within the U.S., combined with a new belief — although it’s early — that we’re not going to use as much oil perhaps in the auto industry [as …] in the past,” says Picton.
Though he expects the oil market to balance as a result of OPEC actions, this new secular headwind means oil stocks aren’t acting as they should. “In fact, they’re acting much worse than we thought they would,” he says. So he’s reduced his position. “There’s a good chance for a bounce, but we’re more concerned about longer-term secular forces.”
Within energy, Picton prefers natural gas stocks because they’ll “power this new electric revolution that we’re supposedly going to go through.” Also, they “still have improving supply-demand dynamics, especially relative to raw crude oil.”
Gold, traditionally used in portfolios as a hedge against loss, is a tougher call. “It’s interesting that with the breakdown in the U.S. dollar, gold stocks haven’t acted particularly well,” says Picton, who intends to monitor the situation. “This might be a story later in the cycle, as we get closer to perhaps a negative feel or influence on the overall market, where gold stocks reassert themselves.”
On August 15 the global gold sector was a weak performer that weighed on the S&P/TSX Composite Index, with The Canadian Press attributing its fall at market close to the strengthening greenback and tensions between the U.S. and North Korea.