Commodity prices have been on a tear, reaching multi-year highs. We are seeing surging prices in crude oil to food commodities, potash and fertilizer to lumber prices. Supply side constraints have played a more prominent role in driving the recent leg up in prices across commodities. Weather has also played a key role in pushing agricultural prices higher across the board, as recent torrential rains in Malaysia wreaked havoc on crude palm oil prices, while the drought in South America pushed soybeans and corn prices to multi-year levels. Not to mention the conflict in Ukraine, raising the geopolitical risk premium and magnifying the prices of crude oil and wheat, as fears of any supply disruptions would further exacerbate the already tight supply balance sheet for these commodities.
On the home front, we see clear winners in commodity related stocks benefitting from the global commodity bull run. Three of the commodity related stocks which I have highlighted in previous posts on this blog have done well and will continue to do well in the current environment.
1) HEXTAR INDUSTRIES BHD
Agrochemical and fertilizer prices have been on a rise since 2021 and there is no signs of slowing down. Hextar Industries Bhd has been a big beneficiary of this, having seen its price almost doubling from RM0.16 at the start of 2022 to RM0.30 (as of 5 Feb 2022)!
2) RESERVOIR LINK BHD
With crude prices breaking through USD90 per barrel, the long term prospects for Reservoir Link Bhd remain promising. Technically, a break and close above RM0.58 would be a bullish confirmation for the next move.
3) FOCUS LUMBER BHD
Focus Lumber traded at a 52 week high of RM1.47 on 19 Jan 2022. It is currently in a consolidaton range between RM1.35 to RM1.40, which in my view offers a good buying opportunity before the next motive move occurs. The current uptrend move started after a successful retest of the RM1.00 level on 7 Dec 2021 is still intact, as long as the RM1.22 level is not broken.
As mentioned in a previous article, a test of RM1.90 and RM2.50 would be target levels to aim for in the medium term.
WHY FOCUS LUMBER?
1) HIGH LUMBER PRICES
Lumber prices have been on a strong uptrend since bottoming at USD 448 in Aug 2021. It last closed at USD 1070 on 4 Feb 2022, up a whopping 238% from the lows in Aug 2021! In fact, the lumber futures trade locked at limit up for the last 3 trading sessions on the Chicago Mercantile Exchange!
Focus Lumber is able to capitalise on the high lumber prices as it supplies plywood to the USA for the Recreational Vehicles (RV) sector. In fact 60% of Focus Lumber’s revenue in the USA is derived from the RV sector. Although there is no futures contract for plywood prices, it tends to mirror the price movement in the price of lumber futures.
2) UPCOMING QUARTER RESULTS
The next quarterly financial results is due to release by the end of February 2022. Given the information that we have, it is likely going to be good set of results which will be the catalyst for the market to work with. However, if you prefer to play it safe you may want to wait for the results to confirm your prognosis before buying but given the relative illiquid nature of the stock, the price will adjust very swiftly to any good news (or bad news)!
As we say in this business, we are trading with the probabities and take the best trades with the best risk-to-reward tilted in our favour.
I believe we are currently at the start of a commodity super cycle. It is probably prudent to invest in some commodity themed stocks to capitalize on the impending bull market conditions. Being early in a supercycle can be very profitable as we have seen in the glove and tech mania recently, but knowing when to cash out is equally important!
Disclaimer: This blog is created for sharing of trading ideas only. It is not in any way or form meant to be an inducement or recommendation to buy or sell any stocks.Consult your financial consultant before making any financial investments.
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