Headline inflation numbers continue to run near their highest levels in 40 years. The Federal Reserve hiked interest rates by 75 more basis points in September. Analysts are rightly nervous about how long this rising-price period will persist.
However, one key sector of the economy is already signaling that the worst of the inflation has already passed. That indicator is commodities. Numerous commodities spiked in the wake of Russia’s invasion of Ukraine this spring. Agricultural products were particularly impacted.
Since then, however, wheat, corn, soybeans and oats, among others, have given back most or all of their post-invasion gains. The price of lumber has slumped by more half from its prior 2022 high. The price of copper, a key metal for electronics and construction, has dove this summer. Precious metals have reversed their prior rally. Oil has fallen back below $100 per barrel.
Long story short, the surge in commodities is now turning into a crash.
It’s unlikely that prices will return all the way to pre-pandemic levels. However, the commodity boom we saw in March 2022 also appears to have gotten significantly out of hand. That being the case, investors should be prepared to lock in gains on commodity stock positions. Here are seven commodity-related stocks to sell before the end of 2022.
Steelmaker Nucor (NYSE:NUE) sent shockwaves through its industry earlier in September. The company updated its guidance for Q3 of this year, with the revised figure coming in well below the market’s prior expectations. Now, Nucor envisions earning roughly $6.35 per share in the current quarter. That’s a massive drop from the $9.67 per share it earned last quarter.
Nucor pointed to falling profit margins and reduced shipping volumes for product compared to past periods. This gets back to the bigger issue with steel. It’s a massively boom-bust industry, with players going from record profits to outright losses over and over.
Investors tend to fixate on the high profit numbers. NUE stock is trading at roughly five times this year’s estimated earnings, which might sound like a steal. But analysts expect profits to drop by nearly two-thirds over the next two years. The falling demand for housing, autos and other big-ticket items after a record 2021 will hit cyclical players such as steel producers hard.
Nucor will be a buy again once the economy stabilizes, but for now, it’s wise to avoid the stock until earnings stop sliding.
MP Materials (MP)
MP Materials (NYSE:MP) is a mining company focused on rare earth materials such as neodymium. You may remember the company as Molycorp. That predecessor firm had a stock that went up tenfold at one point but ultimately went bankrupt in 2015 when the commodity cycle turned south.
MP Materials grabbed Molycorp’s mine out of bankruptcy and is now publicly traded following a SPAC deal. Once again, traders have gravitated to MP stock, thanks to geopolitical uncertainty with China. Rare earth materials are in (relatively) short supply, and having a U.S.-based mine could be a strategic asset.
However, price plays a key role. MP stock is still trading at three times its initial SPAC offering price. That’s a rather lofty valuation compared to almost all other SPACs as of late. Meanwhile, the price of neodymium has fallen by nearly half since its February peak. Combine a weakening profit outlook with the fading momentum for mining stocks and MP shares could give back much of their gains.
United States Steel (X)
Nucor is far from the only steel stock vulnerable to a downturn in pricing and demand. U.S. Steel (NYSE:X) stands out as another industry player that traders should sell now.
Historically, U.S. Steel has been even more of a boom-bust entity than Nucor since it has a higher cost profile. U.S. Steel has had various years where it lost money during down cycles. Analysts expect big problems for the company once again. Current analyst forecasts suggest the firm’s profits will drop 26% this year, plunge 70% next year, and fall another 39% in 2024. All told, that would take the company’s earnings from more than $15 per share on a trailing basis to less than $2 per share by 2024.
A lot of traders see X stock going for less than two times trailing earnings and think the stock must be the deal of the century. But those earnings were exceptionally temporary in nature. With the economy turning south, energy prices rising and demand from China looking sluggish, look for U.S. Steel’s recent prosperity to come to an abrupt end.
Unlike most of the other stocks on the list, Albemarle (NYSE:ALB) is still enjoying peak enthusiasm. In fact, ALB stock hit new 52-week highs in September.
On the face of it, everything seems to be going right for the gigantic lithium producer. Lithium demand is surging thanks to electric vehicles and other renewable power applications which require batteries. The recent Inflation Reduction Act should provide further subsidies to drive adoption. And the nation of Chile, where Albemarle has extensive operations, just rejected a proposed anti-business constitutional reform process.
So what’s not to like?
For one thing, shares have already run up 15% this year. 15 times earnings doesn’t seem excessive, but earnings may come under pressure as additional supplies of lithium come online. Additionally, the current electricity squeeze we’re seeing in various markets such as Europe and California may slow down the momentum for electric vehicles a bit. Albemarle is a good company. But shares are prone to a technical correction here, especially as commodity stocks in general are in a broad selloff.
Newmont (NYSE:NEM) is one of the world’s largest precious metals mining companies. To that point, it has more than 92 million ounces of proven and probable gold reserves.
Unfortunately for investors, the bull case around gold has failed to play out as expected. With the surge in inflation, gold and silver were supposed to soar to new heights. Instead, they rallied modestly and then sputtered out. If gold can’t work as an inflation hedge now, amid unprecedented rising prices, when is it going to pan out?
Meanwhile, even after the sharp decline in the price of NEM stock, shares still aren’t cheap. Newmont is currently going for around 18 times this year’s estimated earnings. And analysts see earnings dropping in both 2o22 and 2023. Bulls can point to the company’s 5% dividend yield as a saving grace. But with earnings forecast to come in around $2.50 per share this year, there’s little margin of error for Newmont’s current dividend. With precious metals falling, profits stagnant, and a possible dividend cut on the horizon, Newmont is a sell today.
Vulcan Materials (VMC)
Vulcan Materials (NYSE:VMC) is a leading producer of aggregates that are used in construction. Building materials have been a great place to be over the past year. Vulcan sells into the housing market, which was scorching hot until a few months ago. It’s also big in providing materials used in road construction; this area gained investor enthusiasm thanks to the passage of the federal infrastructure package.
Vulcan is a better business than it might seem like due to geographical advantages. Namely, aggregates are exceptionally heavy and thus it’s not cost-effective to ship them far. As a result, Vulcan often tends to have monopolies on local markets and get good pricing power when it sells products.
However, there are limits to how much this sort of business is worth. And VMC stock is currently testing said limits. At 30x this year’s estimated earnings, Vulcan stock is going at a hefty premium for a company that sells concrete, asphalt and other such basic goods. Throw in a slowing housing market, and Vulcan shares seem set to deflate a bit from their currently lofty perch.
Occidental Petroleum (OXY)
Almost all of the major oil and gas stocks look cheap based on their current earnings outlooks. Despite big gains in their share prices over the past 18 months, oil stocks still seem like reasonable bets to close out 2022.
But not all oil companies are created equal. Occidental Petroleum (NYSE:OXY) is infamous for its questionable capital allocation decisions. Specifically, its move to overpay when acquiring Anadarko in 2019 led the company to a liquidity crunch. Warren Buffett’s Berkshire Hathaway (NYSE:BRK-B) stepped in with financing for Occidental at the time and has made a small fortune off that prescient move.
Fast forward to today and Berkshire continues adding to its stake in Occidental. This may make sense from Buffett’s position as a large shareholder that can influence the business.
For minority shareholders, however, Occidental remains a company with an unimpressive track record and a fairly middling collection of oil assets. With oil prices now backing off their recent peak, this is a great time to rotate out of a riskier oil stock like Occidental and into more trustworthy ones with greater operational stability.
On the date of publication, Ian Bezek held a long position in BRK-B stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.