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A Materials World
Demand for basic materials and commodities in China and other emerging markets are tightening supplies, says T. Rowe Price New Era manager Charles Ober. See which stocks he believes will benefit.
By Steven Goldberg, Contributing Columnist, Kiplinger.com
May 4, 2004
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In 1980, the basic materials sector, which includes energy stocks, made up 40% of the S&P 500's total market value. Today, the sector is a mere 8% of the index. Some smart people are saying that percentage is going to rise.
The argument makes sense. Almost everywhere you look in the world, economies are growing. The most rapid growth is in emerging markets, such as China, which are very inefficient consumers of basic materials like energy.
Meanwhile, the supply of oil and other materials is constrained. Without money from stock investors, many basic materials companies have been unable to expand capacity. "Investors just haven't paid much attention to these companies," says Charles Ober, manager of T. Rowe Price New Era (PRNEX).
Ober isn't arguing that oil will stay at $37 a barrel or that commodities will continue to surge in price. But he does think it's going to take awhile -- as much as five years -- for supply to catch up with demand of many basic materials. "I don't think oil is going back to the low 20s," he says.
Higher prices ahead
More important, he thinks that prices of many basic materials' stocks don't reflect the changes in demand. Instead, analysts who have watched these stocks' profits blip up only to fall again for more than 20 years are expecting the same thing to happen again this time. "They're saying this is the top. Commodities are usually early cyclicals, and they think it's over."
Ober doesn't think so. "I know it's dangerous to say these words, but I do think it's going to be a little different this time. I think you're going to see these stocks with higher P/Es before this cycle is over."
Ober, 54, has been following basic materials since 1975. So his views can't be dismissed out of hand. Nor is he arguing that you should mortgage your house to buy oil stocks. Rather, he suggests that 5%, maybe even 10% of the stock portion of a good portfolio ought to be in basic materials stocks -- or a fund like his.
Vanguard Energy (VGENX) is a good way to get the same kind of exposure, but New Era has almost half its assets in materials other than oil and gas stocks.
Commodity prices have retreated a bit in recent weeks largely on fears that China's growth may stall. The central government, aware than the current 10% annual growth rate is dangerously fast, is trying to slow things down. "We're going to have bumps in China," Ober acknowledges.
But Ober isn't talking about a short-term trend. He thinks earnings on oil and other materials stocks should rise for some time.
At the same time, Ober doesn't think that the rest of the stock market or the economy has to suffer -- as it did in the 1970s -- if commodity stocks do well. Developed economies, such as the U.S., have become much more efficient users of commodities like oil.
Hot commodities stocks
Ober recommends a large number of stocks. As always, please use his picks merely as starting point for your research. Among his favorites, along with his reasons for owning them:
British Petroleum (BP), ChevronTexaco (CVX) and ExxonMobil (XOM), three of the world's biggest integrated oil companies, all stand to benefit from the pickup in demand for energy.
Baker Hughes (BHI), Cooper Cameron (CAM) and FMC Technologies (FTI), three oil service companies that should profit from increased demand for oil.
Newmont Mining (NEM), a leading gold mining company. Ober believes inflation will pick up, and gold will continue to be a leading indicator of inflation.
BHP Billiton (BHP), a diversified Australian mining company that produces copper, coal and oil. A well-managed company, it's buying back shares and pays a dividend.
Nucor (NUE), a steel mini-mill company, acquired competitors for a song during the long drought in earnings.
Enersis (ENI), the Italian national oil company, has a decent American Depositary Receipt and a good earnings outlook.
Agrium (AGU) and Potash (POT), two big fertilizer companies, that will benefit from increasing demand for agricultural products.
Bowater (BOW), International Paper (IP) and MeadWestvaco (MWV), three of the biggest paper producers. Ober thinks the commodity, as well as the stocks, should move higher.
