Is this the best FTSE commodity stock to buy to profit from the power shift?

FTSE 100 the goods giant Rio Tinto (LSE: RIO) is down 13% from its 20 May 12-month high of £58.51. I already own shares in the company but am considering buying more based on the ongoing dynamic.

I believe that the transition to net-zero emissions may take longer than many think. But this movement seems to have come with an unstoppable momentum, which I believe is a good thing. And without wanting to be a mercenary about something so important – if I can make a profit from this, all the better.

What is the reason for investing?

Clean wind, solar, water, and geothermal resources require a lot of metals to convert into energy.

For example, a single offshore wind farm requires six times more steel per megawatt of power produced than thermal coal plants, according to HSBC. Copper and lithium are also widely used in each of the clean energy sectors.

The International Energy Agency estimates that to achieve net-zero emissions by 2050, the world will need to triple its renewable energy capacity by 2030.

This suggests to me that a dramatic increase in the production of these essential goods is on the cards.

Where does this company fit in?

Rio Tinto is targeting significant increases in output of iron ore (used in steel), copper and lithium in the coming years.

In particular, it aims to increase its steel production by 5m tonnes per year until the end of 2025. Currently, it is estimated at 323m-328m tonnes per year.

It also targets an increase in its annual copper production by the same point to 780,000-850,000 tonnes from 660,000-720,000 tonnes. By 2030, it aims to produce 1,000,000 tons per year.

And the company now controls the world’s largest lithium resource base following its purchase of Arcadium Lithium on October 9 for $6.7bn.

How low are stock prices?

This deal – along with its large iron and copper presence – makes Rio Tinto a global leader in energy conversion assets.

The danger in stock is that energy conversion is slow for some reason. This will delay the benefits of the investment it has made to achieve that.

However, analysts predict that it will generate a return on equity of 16.8% by the end of 2027.

The important question for me now is whether the shares also look worthless.

On the stock’s price-to-earnings ratio, they trade at just 9.1 compared to a competitor’s ratio of 18.1. So they look very cheap on this basis.

The same is true of its price-to-earnings ratio of 1.8 compared to a peer group average of 2.7. The same is true of the price-to-sales ratio, where it trades at 1.8 compared to the competition’s average of 2.1.

A discounted cash flow analysis shows that the stock is undervalued by 30% at its price of £50.95. So its fair value is technically £72.79, although market uncertainty could make it lower or higher.

Will I buy more shares?

Given its presence in energy conversion assets and its undervaluation, I think it is at least one of the best stocks in the sector.

It also offers a high yield of 6.7% currently, compared to the FTSE 100 average return of just 3.6%.

As a result, I will buy more shares in the company in the near future.