This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

3 Commodities Stocks Investors Should Dump

Stocks in this article: MORN AGQ COG MRO EP TSO VLO

BOSTON ( TheStreet) -- Commodities cratered last week, with silver posting its biggest decline since 1975 and oil recording its largest drop in three years, sending a chill through the markets as the hottest, and best-performing, investments turned cold overnight.

Increases in Comex margin requirements decimated bets on silver, which plunged 27% in a week, and gold slid for three days, the worst decrease in a year.

Individual investors, who have been playing the commodities markets through exchange traded funds, have been burned. The heavily traded ProShares Ultra Silver (AGQ) fund has dropped by 48% in just five trading sessions, illustrating Newton's law of investing: What comes up, must come down. Still, the sell-off has positive implications for the economy.

The major hurdles threatening the recovery, such as higher gas prices and a resulting cannibalization of consumer spending, have been lowered. Also, lower food prices will benefit U.S. consumers and slower inflation bodes well for lower interest rates, supporting stocks. In sum, one relatively simple move -- boosting margin requirements and, thus, restoring a supply-and-demand dynamic to commodities -- has had positive implications for every facet of the economy, and even more importantly, for investors' sentiment.

There are still many precious-metals bugs and commodity enthusiasts who are preaching that the bull market will continue. Although prices may rebound in the short-term, the longer-term outlook for commodities, especially those that will restrain consumer spending, has materially worsened as policy-makers now have proof that excessive low-collateral speculation, rather than a demand increase or even a geopolitical risk premium, has fueled a brisk six-month rally. Digging into commodities stocks reveals further risks in so-called momentum companies.

Three stocks to be wary of are Cabot Oil & Gas (COG), El Paso (EP) and Marathon Oil (MRO), the top-performing S&P 500 energy stocks this year. They have risen about 35%, earning windfalls for opportunistic investors. With crude oil now safely beneath $100 a barrel, gasoline's per-gallon cost may drop back below $4 by summer, a critical level for ensuring expansion of consumer spending. Cabot, an exploration-and-production company, El Paso, a transmission-and-production company, and Marathon, a smaller integrated oil-and-gas company, aren't as exposed as the refiners, whose stocks have rocketed in six months.

With crude below $100, but above $90, most oil-and-gas companies will remain in a sweet spot, in which profits are healthy and criticism about pump prices is subdued. But, the refiners, whose business is damaged by oil volatility and which enjoyed their last period of sustained profitability in 2007, may drop precipitously if the oil correction gains momentum. Two refiners that have paced the S&P 500 over the past six months are Tesoro (TSO) and Valero (VLO), one-time picks of star hedge fund manager David Tepper. Tesoro has appreciated 76% in that brief span and Valero's has gained 40%. Neither receives glowing reviews.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 18,030.21 +6.04 0.03%
S&P 500 2,081.88 -0.29 -0.01%
NASDAQ 4,773.4720 +8.0480 0.17%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs