Commodity Plays: The Search For What Hasn't Moved Yet

Crunch time for portfolio managers.

I read in Barron’s this weekend that the average US stock mutual fund manager is about 5% ahead of the S&P 500 this year, according to Lipper.  OK, but it’s the below-average performing PM that really needs the juice right about now, with 10 weeks or so left to make his benchmark.

So where will they look to for that extra oomph? One place might be in commodity-related stocks, especially those linked to commodity plays that haven’t kept up with the CRB index as a whole, which is up 17% over the last 200 days:

The CRB Index - Last 200 Days

The Reuters/ Jeffries CRB Index in the chart above is the most widely-used measure of commodity returns, it’s been in existence for over 50 years.

But alas, not all commodities are created equal!

In anticipation of a global recovery, the leading commodity sub-category has been Industrial Metals, which is comprised of Aluminum, Lead, Copper, Nickel and Zinc.  These are the metals that the BRIC countries, especially India and China, have continued to gorge themselves on despite the credit crunch.

The next hottest sub-category has been Energy, a group comprised of the various types of Oil products as well as Natural Gas.  The BRIC story comes into play for this group as well, along with the fact that oil is priced in the still-declining US Dollar.

The Precious Metals sub-category, comprised of gold and silver, has had a highly-publicized rally that’s gotten more media exposure than an Angelina Jolie Adoption Trip, so we’ll pass over that story for now.

Below is a quick and dirty scorecard that shows what the various commodity groups (as expressed by the Goldman Sachs Commodities Index) have done this year percentage-wise:

You’ll notice a distinct underperformance by both Agricultural and Livestock commodities.  Livestock (in pink, down 5.4%) is a consumer consumption-based story with very few related stocks and a much messier international outlook, so we’ll put that group aside for now as well.

It’s the agriculture-related commodities (in red, up 5%) that may attract the eye of those hunting the next hot story this fall.

The Goldman Sachs Agricutlture Commodity Index is made up of things like Wheat, Coffee, Corn, Soybeans and Sugar.  The outlook for international demand for these commodities is obviously predicated on when the trend of Third World middle class growth returns.

There are no shortage of plays on the ag story in the US stock market.  Many ag stocks, like seed and fertilizer producers and farming equipment manufacturers, have turned in dissapointing 2nd and 3rd quarters this year primarily due to the weakened balance sheets of their North American customers.

US Equity fund managers may be more than happy to take advantage of this near-term disappointment and look for catch-up opportunities in the commodity-related space that could chase the big up-moves that metals and energy stocks have already enjoyed this year.

Here’s a quick look at the components and dollar weightings in Goldman Sachs’ commodity index groups for your own information:

Happy hunting to those trailing their benchmarks…it ain’t over yet!

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