No responsible financial pro – except one of Hillary Clinton’s friends, perhaps – would answer yes to that question. It’s heresy. The markets have been on a joyride, almost without interruption, for more than a decade. Former star mutual-fund manager Peter Lynch is practically a household name. Commodities, meanwhile, have been on their backside. But the world shunned stocks and bonds once, too. And lately the humble stuff of mines, smelters and forests has begun to look more glamorous: commodities have left stocks and bonds in the dust this year. The Journal of Commerce index of commodities is up 7.4 percent, while stocks have slid 2 percent and bonds are down 7.2 percent.
Those numbers have certainly made the big-money crowd snap to attention. Pension funds, insurance companies and hedge funds have poured about $1 billion – triple last year’s figure – into commodity investments structured by Goldman Sachs this year. A handful of large mutual-fund companies are designing commodity-oriented funds, too. Of course, few investors should start loading up on pork-belly futures. Leave those to the Maalox-chuggers. But adding a few stocks of the companies that produce copper, oil, steel and other raw materials could juice your portfolio’s returns over the next 18 months.
The first reason for industrial commodities’ new shine is simple: U.S. manufacturing activity is picking up. Factories were operating at 83.6 percent of capacity in April, the highest since mid-1989. When automakers, equipment manufacturers and packaging plants swing into high gear, their appetite for raw materials grows doubly fast because they have to build inventories just to catch up with customer orders.
To fill those warehouses, raw-materials makers are loading trucks and rail cars as fast as they can. U.S. steelmakers are producing at an annual rate of 90 million tons – the highest level in 15 years. The lowly corrugated cardboard box used for shipping everything from computers to toilet paper is in such demand that plants are operating at 97 percent of capacity – just about sold out, figures Mark Rogers, a Prudential Securities analyst. The result, of course, is higher prices for such materials. But here’s where things get interesting: even in a normal business cycle, commodity-price jumps can make your head snap back. This time around, however, the leaps could be startling, largely because commodity values have been unusually depressed for years.
One reason for their lifelessness: corporate America’s newfound loathing for inventory. In learning to keep the cupboard bare, U.S. manufacturers have slashed inventories to their lowest level in a decade, reports Jim Grant, editor of Grant’s Interest Rate Observer. Prices have also been battered by the deluge of raw materials from the former Soviet Union. By 1992 the world was flooded with commodities and mired in recession. Commodity prices had sunk to their lowest point in four decades. But that’s good, because now stores of copper, steel and oil are getting scarce just in time for the next price propulsion – from the recovering European and Japanese economies. ““That’s what is going to send prices into hyperspace,’’ says Louis Salemy, manager of the Fidelity Select Industrial Materials fund. One of the first signs: exports of corrugated cardboard, which reflects industrial activity because it’s used to ship finished products, hit an all-time high of 3.6 million tons last year.
All of this makes a tidy argument for buying the stocks of companies that peddle commodities. The most ardent bulls, however, believe there’s more to it: mushrooming demand from developing nations.
Citizens in China, India and Mexico will not respond to increasing incomes by opening retirement accounts, as we might. ““All of the pressing needs of most of these populations – nourishment, secure shelter, sanitation, power, transportation – involve direct increases in the use of raw materials,’’ essayses Michael Aronstein, president of West Course Capital in Rye, N.Y.
What could happen to the aluminum market if all 1 billion Chinese learn to drink Coca-Cola? John Crawford at Grant’s Interest Rate Observer estimates that if China and India had knocked back as much aluminum per person as Taiwan did last year, they would have used 28 million tons – 13 million more than 1993 worldwide production.
There are plenty of caveats to this scenario. An explosion in demand isn’t certain this year. And if Third World appetites for commodities do escalate, they may be too disruptive to profit from. Still, surging demand by emerging economies is by no means required. U.S. factories are doing a fine job of driving commodity prices higher all by themselves. The European and Japanese economies are coming to life. Here are some safe ways to invest in the boom:
Analysts say this is a great time to buy Bethlehem Steel, at $18.50, and Allegheny Ludlum, at $17.75. A recent dip in scrap-steel prices and March market jitters troubled some steel investors, driving prices lower. But the steel industry is having its best year in two decades, says Charles Bradford, a metals analyst at UBS Securities, who expects higher steel prices to continue. Bethlehem’s flat rolled steel, used in cars, is sold out. Because only about 50 percent of its sales are tied to contracts, its income responds to price hikes fast. The stock could hit $28 next year, according to Bradford. With excellent management and a stellar earnings record, stainless-steel maker Allegheny is the classiest steel play around – and usually the priciest. But a labor strike, which has hurt the stock, means you can buy in at a reasonable price. With plenty of cash on hand and its production sold out through the fall, Allegheny’s stock price could shoot up to $30 in 1995.
Supplies of corrugated cardboard are scant, and the industry has already raised prices three times. ““What I’m excited about is that we have shortages already,’’ says Ken Heebner, fund manager of CGM Capital Development. That’s especially good for Temple-Inland, which responds in a flash to higher linerboard prices, says Prudential’s Rogers, who is forecasting that its earnings will more than double this year.
Polyvinyl chloride, methanol, phenol. Who buys this stuff? Surprisingly hungry buyers from the U.S. construction industry and Latin America. Investors have already helped the stock of Georgia Gulf, which has risen to $32.38 from $23 early this year. But it could reach $45 in 1995. ““The selling price of every single Georgia Gulf product except one is moving up from where it was three months ago,’’ says Leonard Bogner, senior chemicals analyst for Prudential Securities.
Analysts just hate to recommend oil stocks. But while they’ve been busy trying to divine OPEC’s true intentions, something dramatic has happened: oil production is at near capacity and crude-oil prices have increased 28 percent, to $18 a barrel, in recent months. ““Inventories are much tighter today than any time in the last 10 years,’’ says John Rohr, fund manager of Mackenzie American. Bet on British Petroleum when oil prices rise. Though its stock is richly priced, the recently restructured company benefits immediately from escalating oil prices. Fidelity’s Salemy thinks BP, now at $71.13, could hit $100 per share. His other favorite, Amerada Hess, sells for $50.75 and is launching three big projects that will bring in a bundle of cash.
If staking several thousand dollars on a single commodity’s comeback is too much of a plunge for you, look at two mutual funds: Fidelity Select Industrial Materials and Mackenzie American. Industrial Materials had a banner 1993, logging a 21.4 percent return, and has already outgunned most stock funds this year with an 8 percent return. Tiny Mackenzie American, which focuses on capital goods like farm tractors, industrial manufacturers and raw-materials producers, saw its early 1994 gains erased in March. Manager John Rohr is still predicting a strong global recovery.
That might leave the Chicken Littles something to agonize over, but if your prudent financial planner warns you that commodities are a lifeless corner of the investment world, think back to 1980. ““You couldn’t get anyone interested in long-term bonds then,’’ says West Course Capital’s Aronstein, who was trying to do just that for Merrill Lynch back then. Investors who moved into that sector have been ecstatic. In fact, 1980 was the beginning of the biggest bull market in bonds during this century. Next in the spotlight: steel and linerboard?
