Commodity stocks are a ‘great place to look’ amid the volatility: Fund manager
2 months ago Chiyo Lee
Investors are flocking to safer corners of the market amid the current market volatility, with tech a particular favorite right now. But fund manager James Davolos believes the commodities sector is where it’s at for savvy investors. “I don’t really worry about volatility that much, but I continue to think that the one universally underpriced asset class today is commodities,” Davolos, portfolio manager at Horizon Kinetics, told CNBC’s “Street Signs Asia” on Monday. One of the most obviously underpriced commodities in recent weeks has been oil, according to Davolos. He said the recent decline in crude prices has been largely due to technical variables and comes despite resilient production and “fairly strong” demand. “If you look at a few more months, whether or not we have a recession or not, I think crude oil is mispriced,” he said. Davolos is also bullish on gold and copper. “If you look at all the structural factors that would cause concern in the world, when the banking system is under strain, you would like something outside of that fiat ecosystem where gold is really attractive,” he said. Fundamentals for copper are also “really strong,” according to Davolos, driven by growing electrification around the world. “So, I think that a lot of these commodities, if you look at the idiosyncratic variables, supply and demand, five-year inventories relative to current inventories, this looks like one of the sweet spots where again, you have to be willing to stomach some volatility, but I think commodities are a great place to look,” he said. Stocks to play it One of his top picks is Lithium Royalty Corp, which owns a royalty portfolio of lithium mines. Royalty companies typically provide funding for mining or exploration projects in exchange for a cut of production revenues or a contracted quantity of the commodity. Lithium is a corner of the commodities sector that Davolos likes, given the long-term demand for the mineral. He sees lithium consumption rising by as much as 40 times from current consumption levels over the next 20 years. Davolos believes the market is underappreciating Lithium Royalty as most of its portfolio mines have yet to commence production. Just two are currently in production, with more than 20 still in the exploration stage. “There’s a pretty heavy discounting mechanism in these mines that are not yet producing,” he said, despite the mines being located in safe jurisdictions and operated by “high quality” operators. Given the discounts, investors are “basically paying nothing for a very robust backlog of companies” based on current valuations today,” he added. Davolos also likes two other stocks : Viper Energy Partners , which owns a royalty portfolio of oilfield assets, and its parent company Diamondback Energy . “Viper Energy has one of the largest backlogs of tier-one locations in the [Permian] basin. And their parent company Diamondback is probably the best, if not one of the best, independent operators. So, you basically have an operator that’s self-funding production at the highest quality acreage and sponsoring the growth of your royalty cash flow,” Davolos wrote in notes to CNBC on Monday.
