The short-term volatility in natural resource stocks can leave investors skittish, especially given their movement with either commodity or equity markets. But Jeremy Grantham and Lucas White of global investment management firm GMO published a white paper that offers some arguments in favor of including this asset class in a balanced portfolio:

• Growing demand and finite supply of natural resources;
• Diversification they can provide, as evidenced by low correlations with broader markets over long periods;
• Over 10-year periods, commodity producers have rarely delivered negative returns;
• The premium associated with equity investing versus direct purchase of raw materials;
• Equities provide an inexpensive way to access commodities without the costs associated with futures contracts.

Using our guru-based investment strategies, we identified the following picks:

• Cameco (CCJ) is engaged in exploration, development and sale of uranium. The company’s favorable book-to-market ratio as well as its positive return-on-assets and operating cash flow earn high marks.
• Dow Chemical (DOW) manufactures and supplies raw-material products for many businesses around the world. Cash flow of $9.55 per share coupled with a solid revenue base make this stock appealing.
• NK Lukoil PAO (LUKOY) is engaged in oil exploration, production, refining and distribution. The company’s size, solid cash flow-per-share and strong revenue base show well.
• Rio Tinto (RIO) processes and markets mineral resources. The company has a strong top line, shares outstanding of twice the market average, and solid cash flow-per-share.
• Total (TOT) is an oil and gas exploration, production, marketing and shipping company with a hefty market capitalization ($115.91 billion) and attractive cash flow-per share.
• Universal Forest Products (UFPI) supplies wood and wood products to the construction, industrial and retail markets. Consistent growth in earnings and modest price-sales ratio as well as low leverage make this stock appealing.