With the current market volatility, investors are flocking to safer corners of the market, with technology being particularly popular at the moment. But fund manager James Davolos believes the commodities sector is the right place for savvy investors. “I’m not really that concerned about volatility, but I still think commodities are the only broadly undervalued asset class today,” Davolos, portfolio manager at Horizon Kinetics, told CNBC’s Street Signs Asia on Monday. According to Davolos, one of the obviously undervalued commodities in recent weeks has been oil. He said the recent drop in crude oil prices was largely due to technical variables and came despite robust production and “fairly strong” demand. “If you look a few more months, whether we have a recession or not, I think crude oil is mispriced,” he said. Davolos is also optimistic about gold and copper. “If you look at all the structural factors that would be a concern in the world if the banking system is under pressure, you want something outside of this fiat ecosystem where gold is really attractive,” he said. Copper fundamentals are also “really strong,” according to Davolos, due to increasing electrification around the world. “So, I think for a lot of these commodities, when you look at the idiosyncratic variables, supply and demand, five-year inventories versus current inventories, this looks like one of the sweet spots where you have to be prepared for 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 fund typically mining or exploration projects in exchange for a cut in production revenue or a contracted quantity of the commodity.Lithium is a corner of the resource sector that Davolos likes given the long-term demand for the mineral.He anticipates lithium consumption to increase in the will increase 40 times over the next 20 years compared to current consumption Davolos believes that the market will Lithium royalty underestimated as most of its portfolio mines haven’t started production yet. Only two are currently in production, with more than 20 still in the exploration phase. “There’s a pretty strong rebate mechanism in these mines that aren’t producing yet,” he said, despite the mines being in safe jurisdictions and run by “high quality” operators. Given the discounts, investors are “paying basically nothing for a very robust stock 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 owns, and its parent company Diamondback Energy. “Viper Energy has one of the largest backlogs in prime locations in the US [Permian] Pool. And its parent company, Diamondback, is probably the best, if not one of the best, independent operators. So you basically have an operator that self-funds production on the highest quality acreage and sponsors the growth of your royalty cash flow,” Davolos wrote in a note to CNBC on Monday.
Source : www.cnbc.com