It all adds up to volatile-priced stocks. We can make a lot of money in a short time on the upside. And those profits can melt away even faster when the market mood changes, even with the long-term supply and demand fundamentals exceedingly positive.

Last week, we again laid out our strategy for capturing maximum returns from this ongoing bull market. Since then, our picks have tacked on more gains, leaving us up 25 percent since inception in October 2007.

In light of that, it’s time to take a look at the other side of the equation: risk.

The biggest danger for all commodity-related stocks in the coming months is the US economy. The question is no longer: Will the US economy slow? Rather, it’s how much it will slow and whether or not it will push other economies into recession, notably in Asia.

The good news is resource prices to date have held firm because Asian demand hasn’t faltered. The bad news is until the US economy does cycle out, contagion will remain a risk.

Make no mistake. We’re still very bullish, particularly for the next several years. Moreover, it’s looking more and more like vital resource prices—and producer stocks—will weather this storm and move onto higher highs in the coming months, particularly as the US finally recovers from its current woes.

Nonetheless, it’s time to take a look at how exposed each of our picks would be if we’re wrong about the big picture and what kind of risk investors are willing to tolerate.

With the addition of food play The Andersons (NSDQ: ANDE)—see more below—we now hold 17 individual stocks and two commodity exchange traded funds (ETF) in the VRI Portfolio. All are great companies with vast promise and are affected by changes in commodity prices. And that’s why we hold them. How much they’re affected or leveraged, however, does vary.

Our diversified companies are the most stable or least-leveraged plays. These include Anglo American (LN: AAL, NADQ: AAUK), Norilsk Nickel (OTC: NILSY) and Rio Tinto (NYSE: RTP). Also meeting the bar for stability—though slightly less diversified—are Companhia Vale do Rio Doce (NYSE: RIO, CVRD) and Xstrata (OTC: XSRAF).

Being diversified means these companies don’t depend exclusively on the fortunes of one or two vital resources. They won’t move as much as pure plays when a particular metal or commodity really takes off. But they’re also far better able to weather a downturn or slump.

These companies, in addition to How They Rate buy recommendation BHP Billiton (NYSE: BHP), are also the world’s largest mining and resource companies. They enjoy unmatched ability to explore for and develop new reserves of a broad range of resources. Their balance sheets are secure, and they’re also the best positioned to weather outbreaks of resource nationalism where they appear.

These strengths set these companies apart from the rest of our recommendations. Vital resource investing isn’t a religion for us, and we’ll certainly take profits on any stock that really runs, as we advised with Rio Tinto last year in the wake of BHP merger talk. But these are also companies for which we’re willing to ride out the ups and downs during the coming months. And by the time this bull market is over, all are certain to be at much higher levels.
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We’re also volatility tolerant when it comes to our gold plays: Goldcorp (NYSE: GG), Lihir Gold (AU: LGL, NASDQ: LIHR) and streetTRACKS Gold Trust (NYSE: GLD). As the rapidly emerging fourth major reserve currency in the world–after the euro, US dollar and Swiss Franc, respectively–gold will make a successful assault on $1,000 an ounce in the coming months and should move considerably higher thereafter.

We’re still at a fraction of the inflation-adjusted high of $3,000, which was reached in 1980. And any significant movement toward that level will trigger quantum gains in our picks.

There’s some differentiation worth noting between our holdings, however. The streetTRACKS ETF basically isn’t leveraged; it reflects purely movements in the price of the yellow metal itself. Lihir, meanwhile, is a very leveraged play, as suggested by its wide trading range over the four months we’ve held it. It stands to gain the most of the three on a surge in gold prices, but it will also be the most volatile. Therefore, we recommend allocating from Goldcorp and the streetTRACKS ETF when you make gold selections.

Five of our VRI Portfolio picks are large-scale companies that are highly focused on a particular vital resource that’s undervalued and ripe for a big gain: Alumina (NYSE: AWC), Freeport-McMoRan Copper & Gold (NYSE: FCX), Mechel (NYSE: MTL), Posco (NYSE: PKX) and Syngenta (NYSE: SYT). But the situation is trickier here.

All of these companies are well positioned to benefit from what appear to be strong growth trends. As a result, their leverage to their sectors should be a major plus in coming months. Long, lagging fundamentals for aluminum are at last tightening up; Australia’s Alumina is a major beneficiary. Copper prices have remained strong despite slowing US growth, and we expect further strength as the US cycles out. Also, a budding play in molybdenum should be a major plus for Freeport shares going forward.

In the steel industry, Mechel’s integrated structure—combining production with ownership of vital inputs such as iron ore—has been a major plus in this environment of rising steel prices as well as rising production costs. Posco’s lack of ownership of inputs has made it a relative disappointment, but its price and demand outlook remain bright. It’s cheap, and we’re sticking with it. Finally, Syngenta is benefiting richly from the increased supply pressures on global agriculture (seeds and crop protection) and its strong position in Asian markets.

Overall, these stocks’ leverage is a major plus on the upside, which is why we own them. On the other hand, the downside will also be magnified. As a result, we’ll be more attuned to taking profits when the time is right.

Our riskiest and most leveraged group are smaller companies that combine bets on a particular vital resource with Asian growth: China Green Holdings (Hong Kong: 904, OTC: CIGEF), China Molybdenum (Hong Kong: 3993, OTC: CMCLF), Hyflux (Singapore: HYF, OTC: HYFXF) and Sino-Forest (Canada: TRE, OTC: SNOFF). We view all of these as potential homeruns. But again, they’re our most leveraged plays and are likely to be the most volatile as well.

Finally, Power Shares DB Agriculture Fund (AMEX: DBA) is a pure bet on a basket of agricultural commodities. This has been a very hot sector, and we’re expecting a lot more upside. But no one should buy it unless they’re willing to tolerate a great deal of volatility on the way to higher highs.

These stocks and ETFs represent the best bets on the four major groups of vital resources: base or industrial metals, precious metals, agriculture/water and industrial materials. Our strategy in the VRI Portfolio will be to buy and hold them until they reach their full potential.

When picking and choosing what’s best for individual portfolios, however, the volatility question shouldn’t be ignored. Everyone who invests in vital resources should be prepared for ups and downs. That’s the nature of the game.

The more conservative, however, will want to weight more toward the least volatile plays, while the more aggressive will want to position toward getting more bang for their buck. And everyone should be prepared for more VRI Portfolio turnover among the more leveraged picks. That’s how we’re going to get the most from what this once-a-generation vital resource bull market has to offer.

Sixty years ago, Harold Anderson and his family opened a grain elevator with nine truck dumps. Their goal: provide rapid turnaround and better service to regional farmers to make taking their grain to market easier.

As the next generation has taken the leadership, the company now operates diversified businesses in the agriculture and transportation markets, including grain handling, ethanol services, railcar leasing, sales of plant nutrients and turf products and retailing. The Andersons also has equity investments in three ethanol facilities as well as in Lansing Trade Group, a trader of grain and ethanol.

The company employs 3,000, and 2007 was its best year on record with revenues of USD2.4 billion (up 63 percent) and profits of USD68.8 million (up 89 percent).

The Andersons can be viewed as a small-scale conglomerate with an agricultural bias. The diversification of its business allows it to benefit from a growing economy. It also provides relative protection on the downside as the company cashes in on the rapid growth of global food demand, one of the most important investing themes of our time.

The company’s management has consistently earned some of the highest marks in the business, and its customer focus approach has gained it solid recognition among its current and potential customer base. The company is divided into five business divisions; the most important is the Grain and Ethanol Group.

Source: Bloomberg

The grain and ethanol division operates 13 grain terminals in the Midwest, handling approximately 151 million bushels of grain and oilseeds (primarily corn, soybeans and wheat) in 2007. The facilities store and condition the grain, then ship it via rail or vessel to customers. The division also owns 47 percent of Lansing Trade Group, which should continue to benefit from higher and more volatile grain and ethanol volumes. The main risk for the division is that high corn prices could lower margins that higher fuel prices might not be able to offset.

The plant nutrient division operates 17 locations where they formulate, store and distribute about 1.8 million tons of dry and liquid agricultural nutrients each year to dealers, distributors and farmers. The division also manufactures low corrosive and environmentally friendly liquid anti-icer products for commercial use, and it’s a supplier of nitrogen reagents used to scrub nitrous oxide pollutant from the emissions of coal-burning power plants.

The division is the second biggest profit center for The Andersons; most of its volume is being applied to corn acreage. This is a mature industry, and the company has been able to perform well because of its customer service efforts, though a slowdown in the corn planting numbers this year will negatively affect the division’s results.

The company’s rail division (23,000 cars and locomotives) sells and leases rail cars, and it provides fleet management services on a contract basis. The division also operates steel fabrication and manufacturing facilities. Its fleet of cars expanded by 8 percent last year, and it currently enjoys one of the highest utilization rates in the industry as demand for grain and ethanol transport services continues to grow.

The slow growers of the company are its retail and turf and specialty divisions. The retail division operates seven stores in the Ohio markets. Designed to provide the company with direct access to consumers for its lawn care and high quality food items, the stores also sell a broad line of general home merchandise. The company has been focusing on reducing costs through inventory and capital management as well as labor efficiency.

The turf division is a supplier of turf-care products for golf courses and other professional markets and manufactures turf and ornamental plant fertilizers. It seems to us that the turf division could potentially be divested as the company focuses and expands its core business. This should be a positive for the stock, but it remains to be seen what management will decide after evaluating its performance at the end of the year. The division recently went through a restructuring to boost margins.

The Andersons is a relatively small company, which is why we group it with our potential homerun bets. But it’s also been run well for years and—thanks to ongoing strategic repositioning—should be in prime position to profit from the next upcycle in the economy. The Andersons is a new addition to the VRI Portfolio as a buy at current prices.

Source: Bloomberg