Resources companies enjoyed a highly prosperous year in 2016. The prices of commodities such as oil and gold performed relatively well, with the former up by around 48% and the latter gaining 4.3% despite tailing off at the end of the year. In 2017, both commodities could experience further gains, which means that buying oil and gold stocks could be a shrewd move. Here are two stocks which could therefore be of great interest to Foolish investors.
An expanding oil stock
Tullow Oil (LSE: TLW) is in the process of rapidly increasing its production as it seeks to become a more focused oil producer. While it will still devote capital to exploration, it’s now seeking to improve its cash flow and financial position through using its strong asset base.
Central to this is Project TEN, which came on-stream in 2016. This is rapidly increasing the company’s production and while the price of oil is still below $60 per barrel, Tullow’s earnings are expected to increase by over 11 times in 2017. This puts it on a price-to-earnings growth (PEG) ratio of only 0.1, which indicates that it has high capital growth potential.
While the agreement among OPEC members to cut production only lasts until the middle of the year, the prospects for the oil price remain upbeat. Demand for oil is forecast to catch up to supply and erode the deficit which has plagued the oil price in recent years. As such, a large fall in the price of black gold seems unlikely. And with Tullow increasing production, it looks set to be a strong performer even if oil fails to make a similar level of gain to that achieved in 2016.
A cheap gold miner
Highland Gold (LSE: HGM) has significant appeal at the present time thanks to gold’s status as a store of wealth. With the global economy facing risks such as a new US president, Brexit and uncertainty regarding Europe’s future, investor demand for the precious metal could increase. And with gold being 37% below its all-time high, there’s scope for a significant rise in its price over the coming months.
With Highland Gold trading on a price-to-earnings (P/E) ratio of 10.8, it offers a wide margin of safety. This means that its price may not be affected to a large degree by a falling gold price, but could respond positively to a rising gold price. And with the company yielding 5.4% from a dividend which is covered 1.7 times by profit, it remains a sound income option for the long term.
Certainly, the price of gold is set to be negatively impacted to at least some extent by the three planned interest rate rises in the US in 2017. However, inflation may overshoot expectations and cause gold to become more popular. And with the market having priced in interest rate rises in recent weeks, the outlook for gold given the uncertainty present in world markets remains positive.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.