Despite Volatility, Commodity Stocks Are Still A Good Investment

In light of recent market volatility, investors are flocking to more safe-haven market areas. Tech stocks are among the most popular at the moment. However, fund manager James Davolos believes commodities are where smart investors should invest.

‍

On Monday, Davolos, portfolio manager at Horizon Kinetics, told CNBC's "Street Signs Asia" segment that he does not think that volatility will have a significant impact on his investment decisions; however, he believes that commodities are one asset class that has always been undervalued.

‍

In the last few weeks, Davolos has referred to oil as one of the most obvious commodities that have underperformed. He says that although a still resilient production level and currently "fairly strong" demand are in place, crude prices are falling generally due to technical factors.

‍

In his opinion, crude oil prices are mispriced if we look at them for a few more months, regardless of whether or not we go through a recession.

‍

Among other things, he is also bullish on copper and gold. “In my opinion, and I was not alone in thinking that, you know, when the banking system is under strain, everyone wants something outside an environment dominated by fiat standards and gold is clearly attractive to people,” Davolos said.  

‍

Electrification around the world has also driven copper's fundamentals, says Davolos.

‍

According to him, commodities are one of the sweet spots where you have to be willing to stomach some volatility, but it is a great place to look for commodities, particularly when you consider the idiosyncratic variables, supply and demand, and five-year inventories in comparison to current inventories.

‍

Playable stocks

‍

He has named Lithium Royalty Corp as one of his top picks in the stock market, which owns a portfolio of royalty rights on lithium mines in several countries. Royalty companies typically provide the capital to mine or explore for minerals for a cut of the revenue or a contracted quantity.

‍

As one of the fastest growing sectors in the commodities sector, Davolos is most interested in lithium. He sees the mineral getting increasingly popular over the next several decades, with lithium consumption doubling as compared to current consumption levels over the next two decades.

‍

Due to the fact that most of Davolos' portfolio mines have not yet been able to commence production, the market is undervalued Lithium Royalty rights. Only two mines are currently in production, while over 20 others are still in the exploration stages.

‍

As he told me, despite the fact that the mines are located in safe jurisdictions and are operated by "high quality" operators, there is a pretty heavy discounting mechanism in these mines that have not yet been produced. He pointed out that, based on the current valuations, investors are effectively paying nothing for a very robust backlog of currently available companies.

‍

There are two other stocks that Davolos likes as well: the royalty portfolio of Viper Energy Partners, and the parent company, Diamondback Energy, which owns a portfolio of oilfield assets.