Commodities, as an asset class have delivered gains for two years in a row. This could be the beginning of a new up trend in commodities after an extended bear market.
One widely followed commodity index, the S&P Goldman Sachs Commodity Index ended 2017 with a gain of more than 11%, building on 2016’s gain of 27.18%. Prior to that, the index recorded three consecutive years of losses and over the past ten years, the index shows an average annual return of a loss of 3.2%.
Analysts point to several factors that could be bullish for the sector. The global economy is growing and that creates demand for many commodities since all commodities from oil to industrial metals are used in the economy. Faster growth tends to create increased demand for agricultural commodities.
Rising commodity prices is inflationary and inflation could be another factor that reinforces the rise in the prices of commodities. For bulls, this becomes almost a self fulfilling and virtuous cycle.
Finding Commodity Trades
To benefit from this expected trend, we searched for cheap stocks. This week, we focused on stocks under $2. The reason we like cheap stocks is because these are the ones that have been proven to be most likely to deliver large gains.
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One study looked at how low priced, or cheap, stocks performed relative to more expensive stocks. The study found that cheap stocks delivered more than six times the average return of the more expensive stocks in a typical quarter.
We also looked at stocks in the basic materials sector and then we limited our list of buy candidates to companies that were profitable in the past year and are expected to be profitable next year.
One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions.
To find stocks that were profitable last year, we screened for a price to earnings (P/E) ratio greater than zero. We also required the P/E ratio based on projected earnings to be greater than zero.
Remember, there is no guarantee any stock will increase in value. Also, it is important to remember when we search for stocks using quantitative measures, our goal is to identify stocks that meet those criteria. The screens we develop could be used as the cornerstone of long term investment opportunities but any individual stock on the list could be a winner or loser.
Potential Winners in Commodities
UR-Energy Inc. (NYSE: URG) engages in the acquisition, exploration, development, and operation of uranium mineral properties. The company holds interests in 13 projects located in the United States. Its principal property is the Lost Creek project comprising a total of approximately 1,900 unpatented mining claims and 3 Wyoming mineral leases covering an area of approximately 37,500 acres located in the Great Divide Basin, Wyoming.
As the chart below shows, the stock has been in an extended down trend but shows signs of a bottoming pattern forming over the past two years.
VAALCO Energy, Inc. (NYSE: EGY) an independent energy company, acquires, explores for, develops, and produces crude oil and natural gas in the United States. The company conducts exploration activities as a non-operator in Equatorial Guinea, West Africa. It also owns interests in an undeveloped block offshore Equatorial Guinea, West Africa; and undeveloped leasehold acreage in Montana.
A similar pattern of a long term down trend and an extended basing pattern in the chart.
Golden Star Resources Ltd. (NYSE: GSS) operates as a gold mining and exploration company. The company owns and operates the Wassa open-pit gold mine, the Wassa underground development project, and a carbon-in-leach processing plant located northeast of the town of Tarkwa, Ghana; and Bogoso gold mining and processing operation located near the town of Prestea, Ghana.
It also holds interests in various gold exploration projects in Ghana and other parts of West Africa, and in South America, as well as holds and manages exploration properties in Brazil.
This stock has been consolidating after an up trend.
Great Panther Silver Limited (NYSE: GPL) a silver mining and exploration company, engages in the mining of mineral properties in Mexico. It explores for silver, gold, lead, zinc, and copper ores. The company holds interests in the Topia Mine and Guanajuato Mine Complex properties.
It also holds mineral property interests in the exploration stage, such as the El Horcon, Santa Rosa, and Plomo projects located in Mexico; and the Argosy project located in the Northwestern Ontario, Canada, as well as in the Coricancha Mine Complex located in the Central Andes of Peru.
The chart shows GPL appears to be bouncing off of support.
Avino Silver & Gold Mines Ltd. (NYSE: ASM) engages in the production and sale of silver, gold, and copper; and the acquisition, exploration, and advancement of mineral properties. The company owns 42 mineral claims and leases 4 mineral claims in the state of Durango, Mexico.
It also holds 100% interests in the Bralorne mine; and the Minto and Olympic-Kelvin properties located in the Lillooet Mining Division, British Columbia, Canada, as well as in the Eagle property located in the Mayo Mining Division of Yukon, Canada.
This stock also appears to have successfully tested support and has shown its ability to deliver large gains in a short amount of time.
Flexible Solutions International Inc. (NYSE: FSI) develops, manufactures, and markets specialty chemicals that slow the evaporation of water. Its products include HEATSAVR, a chemical product for use in swimming pools and spas that forms a thin and transparent layer on the water’s surface; ECOSAVR, a disposable dispenser designed for the residential pool and spa market; and WATERSAVR to reduce water evaporation in reservoirs, potable water storage tanks, livestock watering ponds, aqueducts, canals, and irrigation ditches, as well as for lawn and turf care, and potted and bedding plants.
It also offers thermal polyaspartate biopolymers (TPAs) for oil well to reduce scale and corrosion in various water systems; and for the agricultural industry to reduce fertilizer crystallization before, during, and after application, as well as to prevent crystal formation between fertilizer and minerals present in the soil.
In addition, the company provides TPAs for irrigation to prevent early plugging of drip irrigation ports, reduce maintenance costs, and lengthen the life of equipment; for detergents as a biodegradable substitute for poly-acrylic acid; and for use in personal care products, such as shampoo and cosmetic products.
This stock has been in a trading range for the past years.
Any of these stocks could be a potential winner and all worth further research. For those unsure of their ability to dedicate the time to researching the market, the TradingTips.com service, PPK System, is designed to exploit patterns associated with market clues by looking for value and momentum in stocks.
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