Buy Silver Wheaton and Barrick Gold on Jobs Report
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is fairly uncommon for economic events to unfold in an orderly and easily predictable manner, but in an election, there is added pressure on the powers that be to try to create such an environment. As I noted a week ago in a discussion of the best plays in silver and gold following Ben Bernanke’s speech from Jackson Hole, Silver Wheaton (NYSE: SLW) and Barrick Gold (NYSE: ABX) are the best-in-class choices for each of the big two precious metals. Friday’s nonfarm payroll (NFP) data, also referred to as “the jobs report,” provides precisely the catalyst Mr. Bernanke referred to when giving conditions for QE3. Further quantitative easing is bullish for precious metal stocks and these are the two to own.
The Economic Landscape
To fully understand the significance of the jobs report, it is important to set the stage with what Bernanke said in Jackson Hole. The key language to focus on stated that the Fed “will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” The speech makes a clear connection between the labor market and the next round of quantitative easing – stage set.
Last Friday, when the NFP numbers were released, the next piece of the puzzle fell into place. Once a month, the U.S. Department of Labor’s Bureau of Labor Statistics puts out a report on the state of employment in nonfarm payrolls, with the central figure being the change from the previous month. The number was expected to show that the economy had added 130k jobs, but showed growth of only 96k. Furthermore, last month’s number was revised down from 163k to 141k. While the unemployment rate was reported to have dropped to 8.1%, this is attributed to many workers leaving the labor market rather than finding employment. Overall, the data was disappointing.
Circling back to the unlikely orderly progression of events once more, we have: 1) Bernanke primes the pump for QE3, tying it to the labor market; 2) the NFP number disappoints, showing that the labor market is not doing as well as is hoped; and 3) QE3 is free to begin, probably at the next meeting of the FOMC later this month. You can see the writing on the wall for precious metals. The only question is to what extent the news is already priced into the stocks. My belief is that while names in the sector have already begun to react, there is plenty of upside remaining.
Which Names to Buy
In gold, Barrick continues to be the most attractive play amongst its peers. The company carries a trailing P/E of 9.8 compared to a P/E of 26.7 for Goldcorp (NYSE: GG) and a P/E of 111.4 for Newmont Mining (NYSE: NEM). Adding the growth element yields PEG ratios of 0.12 for Barrick, 1.33 for Goldcorp and 0.13 for Newmont. Ultimately, while Goldcorp and Newmont can offer compelling arguments for being considered the number two choice, Barrick clearly looks to be the best value. When the new philosophy of discipline and potential asset divestitures is included, Barrick becomes an even more obvious choice.
In silver, it is hard to find a reason to favor any company over Silver Wheaton based purely on its superior business model. As a silver streaming company, the organization is insulated against the risks faced by Pan American Silver (NASDAQ: PAAS) and other silver miners. Silver Wheaton contracts for the silver it acquires, earning the spread between its average cost and the market price. Currently, the company has reserves of approximately 800 million ounces at an average cost of $4.04 per ounce. The stock continues to have plenty of upside and great risk protections that allow it to function with an operating margin of 75%.
Pan American has an operating margin of 36% and is one of the more attractive miners in the space. The company has a trailing P/E of just 9.7 and a modest dividend yield of 1.1%. While the company has some attractive characteristics at current levels, Silver Wheaton remains the best name if you are looking for a single silver play.
The Trade
Given the nearly ideal setup being provided by the Fed for precious metals, buying these two stocks should yield positive results. It is likely that more QE will not be as favorable for the broader stock market as some believe, but short of buying commodity futures or ETFs, these are the best companies to own to get exposure to rising gold and silver prices. These stocks have a solid combination of positive attributes and belong in your core portfolio.
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.
