Two Best In Class Metals Stocks for the Bernanke Aftermath
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As is inevitably the case when the Federal Reserve or its chairman does or says anything, the interpretations of the address given by Chairman Bernanke in Jackson Hole vary dramatically. While some pundits are viewing the lack of a specific rollout of QE3 as a sign that the additional easing may not be a forgone conclusion, others believe that it is now a matter of when, not if, more quantitative easing will begin.
Favoring the latter scenario is the fact that the labor market played a key role in the address and recent jobs numbers have been less than stellar. In an interview after the speech, Pimco’s co-chief investment officer offered his own insights into the address stating: “Until you see several quarters of perhaps 7 percent unemployment, you will see QE.” Mr. Gross expects the Fed to act at its regular September meeting and is not surprised that a formal announcement was not made from Jackson Hole.
The precious metals markets appear to agree with Mr. Gross’s understanding of the address, sending both gold and silver prices significantly higher in the wake of the speech. Using the ETFs as proxies, the SPDR Gold Shares (NYSEMKT: GLD) closed Friday’s session 2.3% higher, while the iShares Silver Trust (NYSEMKT: SLV) added 4.6%. Metals traders clearly took the speech as a “when not if” indicator – yes, that is a highly technical investment and trading term – and did not want to be left behind.
The questions investors must now ask are whether the initial reaction was overblown and which stocks make the best choices to harness additional moves higher, should they come. The following two stocks – one in gold and one in silver – should be considered the best-in-class for its respective metal, and are the best vehicles to use when playing the longer impact of QE3.
Barrick Gold (NYSE: ABX) – In the past few months, and under the direction of a new CEO, Barrick has been setting a new course of discipline. In reaction to its most recent earnings miss, the company has begun to explore asset divestitures and is putting efficiency and common sense above sheer production growth. During that time, the company’s stock has dramatically underperformed gold miners in general; Barrick is down about 8%, while the Market Vectors Gold Miners ETF (NYSEMKT: GDX) is up about 3% (see chart).
The languishing price of gold and the earnings miss are responsible for slowing down Barrick, but its underperformance should now be seen as an opportunity. As the stock normalizes in relation to GDX, investors will have the chance to capitalize.
In terms of valuation, the company looks cheap at current levels. On a trailing twelve month basis, the stock has a P/E of 9.4 relative to multiples in triple digits for many of the majors and an industry average just below 14. The company leads its peers in efficiency, with an operating margin of 45%, and as the world's largest producer by volume, Barrick has the wiggle room to focus on quality over growth without the need to concede the top spot. The stock traded 3.9% higher after the Bernanke speech, so buying on dips would be preferable. That said, any price below $39 should prove attractive over the longer-term.
Silver Wheaton Corp. (NYSE: SLW) – This stock was up over 5% in the aftermath of the Jackson Hole speech, reacting strongly to the news as a strong bullish indicator. Silver stocks tend to react more severely to news because the dramatically smaller size of the silver market means that the impact is magnified.
As the world’s largest silver streaming company, the controller of the world’s largest silver reserve at roughly 800 million ounces and a company that boasts an operating margin of 75%, Silver Wheaton is the best-in-class play in silver by a considerable margin. A fellow Fool investigated how the company, amongst others, fared in previous rounds of quantitative easing. He determined that during QE1, Silver Wheaton rocketed up by 505%, while appreciating by 45% during QE2. He rightly points out that much of the 505% was a recovery from the slaughtering the stock endured in the financial meltdown.
While buying on a 5% bump is almost universally not the thing to do, getting too cute with one’s entry point in Silver Wheaton could easily turn into the lullaby of what could have been. Looking for at least a mild dip is prudent, and will likely be rewarded, but scaling-in should either be done quickly or with the knowledge that a smaller-than-desired position may result if the stock runs.
Silver has the potential to run farther and faster than gold and Silver Wheaton is the vehicle with which to capitalize.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.