I think the best stocks to buy now in the FTSE 100 are resource companies. There are three reasons why I would focus on these businesses.
First of all, countries worldwide are spending heavily to stimulate their economies after the pandemic. This is causing a surge in demand for essential commodities such as iron ore and copper.
Secondly, the stockpiles of these resources are running low. After the disruption of the pandemic, companies have not been able to keep up with the spike in demand.
And third, commodity prices tend to provide a good hedge against inflation.
The best stocks to buy now
All of these factors suggest that the path of least resistance for commodity prices over the next few years is upwards. This could be the perfect environment for companies like Rio Tinto, BHP, and Glencore.
BHP and Rio are particularly well-positioned to capitalise on this environment. They are some of the largest mining companies in the world. As a result, they have some of the lowest operating costs and largest economies of scale. They can both produce iron ore for less than $20 per tonne. The price of iron ore at the time of writing is $150 per tonne.
These figures illustrate just how profitable these businesses can be in the current environment. There are other costs to consider, such as energy, staffing and repairing machines. All of these are currently going up. Higher operational costs will almost certainly eat into these companies’ profit margins, but rising commodity prices should almost certainly offset some of the additional costs.
Another challenge these companies may have to take into account is volatility. Commodity prices can be incredibly unstable. Just because prices are rising today, does not mean they will continue to do so indefinitely.
I believe Glencore is one of the best stocks to buy now for another reason. As well as benefiting from rising commodity prices, the world’s largest commodity trading house should also be able to capitalise on economic disruption. Its vast network of ships, ports, pipelines and trucks enables the firm to get commodities to where customers need them.
Considering its international scale, the corporation can charge a premium for these services. Its vertical integration also adds an edge. Being able to produce, sell and distribute commodities is a competitive advantage available to few of the company’s peers.
FTSE 100 giants
I also believe these are some of the best stocks to buy now in the FTSE 100 because they have relatively strong balance sheets. Mining companies have spent the past couple of years reducing debt and paring back needless capital spending.
This means they are incredibly well-positioned to capitalise on the current boom and have the flexibility to return significant amounts of cash to investors. Indeed, based on current analysts estimates, shares in BHP could yield 11% this year, Rio could yield 13% and Glencore, 4.3%.
As such, based on all of the above, I would be happy to buy Rio, BHP and Glencore for my portfolio today. I think the tailwinds outlined above could help these companies outperform in the years ahead.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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