In the meantime, here’s more from Dave…
Bob: Are precious metals and uranium the only sectors on which you’ll be focusing the next few months?
Dave: I’m continuously analyzing all sectors in the commodities space. In the end, I’m pretty agnostic about what I invest in. Too many commodities investors fall in love with a certain sector — and focus on it to their detriment.
My one and only goal in investing is to find undervalued companies. Firms that are selling at a discount to the value of their reserves, or at very low multiples to cash flow.
The thing is, you have a better chance of finding those kinds of value propositions when investors have a reason to hate a company or a sector. This is where the macro-picture comes into play for me. All segments of the resource business eventually swing from boom to bust, from love to hate for investors. Fund manager Don Coxe famously said that the best opportunities come in sectors where those who know it best love it least because they’ve been hurt the most. And right now those who know the gold business well are exceptionally bearish on the sector — worried about lower metals prices and high costs.
When I see that kind of aversion, it signals to me that good buys are more likely to be had here. This happens all the time in cyclical businesses. When the sector is rising, investors make a lot of money. Others join in, trying to duplicate the performance — except they end up buying at the top of the cycle. When it turns down, they go into fear mode and sell irrationally, driving stocks lower than their intrinsic value. That’s time you want to be buying.
Bob: In the most recent issue of Scarcity & Real Wealth, you recommended a gold mining stock that you referred to as your “hands-down favorite.” Out of fairness to current subscribers I don’t want you to name the stock, but please describe one of the key characteristics that you look for in gold stocks in general.
Dave: The gold producer you mention today represents one of the best value propositions I’ve seen in years in this space. It’s one of the most financially stable firms in the industry, both by virtue of strong cash flows and having a substantial cash reserve in excess of $1 billion (the market capitalization is only $6 billion).
And yet, investors hate the stock. Management made a big project acquisition in Africa, which has underperformed. The company had one of its main development projects basically repossessed by the government of Ecuador. And they’ve been forced to cut their dividend completely. These are all good reasons for investors to cringe.
But the result is that today, the company is selling at just over four times its yearly cash flow. That’s an incredibly low multiple. Yet many investors will tell you they won’t touch the company because of the reasons above. But none of those factors substantially affect the company’s income stream. What’s more, this company is actually one of the few gold producers that makes enough cash to cover its capital expenditure needs. Most other producers are actually losing money after capital. So you get one of the most financially stable gold companies in the business, at one of the lowest valuations on the market. I like that combination a lot.
P.S. — Dave’s transition to Chief Strategist for Scarcity & Real Wealth will become complete when he unveils his portfolio in the October issue in a few weeks. There’s no better time to join Dave than now. As a new subscriber to Scarcity & Real Wealth, you’ll get Dave’s in-depth analysis of the gold company he calls his “hands-down favorite” while there’s still time to pick up some shares at a great price. You’ll also receive Dave’s special report, “6 Buffett Rules for Investing in Exploration and Development Companies.” To sign up now, click this link.
Bob Bogda does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of SBUX in one or more of its “real money” portfolios.
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