Two Affordable Commodity Plays

 | Aug 13, 2013 | 12:00 PM EDT
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Stocks in commodity producers have been challenged for over nine months now and have underperformed vastly the overall market. Sentiment seems to be getting a little better, however, on recent better-than-expected numbers out of China.

I am slowly dipping my toe back in the sector as there are some good, long-term values after significant declines within the space. Here are two cheap, high-yielding commodity producers to which I have added recently. Both look like they have recently touched bottom, and both offer good value.

Potash (POT) is the world's largest diversified fertilizer company by capacity and is one of the world's largest potash producers. The stock has been rocked recently on the breakup of the Russian potash cartel, which could lead potash prices to drop some 25% according to some analysts. The equity sells for $31 a share after bouncing off the $29 level. This stock was trading at $44 a share just a few months ago.

Doug Kass has been positive on the stock and added to his position since it dipped below $30 a share. I believe the breakup of the Russian cartel is fully priced into the shares and I have added to my position as well. There is already speculation that this breakup is actually a negotiating ploy and the cartel will eventually be reconstituted. In addition, the speculated drop in potash prices has not been seen in the market yet, and Potash is a low cost producer in this space.

In addition to bad news being fully reflected in the share price, the stock provides a yield of 4.8%, which should also put a floor on any additional declines. The long term thesis for owning this agriculture stock still holds water as well. The developing world is adding tens of millions of new "middle-class" consumers to the market every year. This will increase demand for higher quality food. This will increase demand for fertilizer, which will in turn produce a tailwind for potash producers.

Any news that the cartel is re-forming, or BHP Billiton (BHP) announcing it will not pursue building a $14B potash mine in Canada, could be major catalysts for the stock.

Freeport McMoRan (FCX) is a major copper and gold producer, which recently diversified into oil and gas as well. The stock recently bounced off better than a three-year low of just under $28 a year a share, and now is priced at right under $32 a share. This is another commodity play with a high yield (4%) that should provide some sort of floor under the equity price.

Insiders seem to think the FCX shares are undervalued, judging by the more than $3 million in new shares they have purchased since June. Like most major miners, the company is pursuing cost reductions as well as non-core divestitures.The stock is selling for less than 7x 2011's earnings and is coming off a multi-year low.

The company is well-positioned long term to supply needed resources to China and other developing countries. It is a value stock with a nice dividend that I will continue to add to anytime it drops below the $30 level.

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