The Ugly Gold Miner Stocks are Starting to Look Pretty
Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I don’t make any claims to understanding the intricacies of international gold markets. I’m not a gold bug. Neither am I a gold hater. Quite honestly, I don’t have a strong opinion about whether or not gold prices will go up to over $2K per ounce this year. For all I know, they could continue to muddle around at current levels or even go down more.
What I do know, however, is that I like stocks that have good growth potential and are attractively valued. I pay attention when stocks of companies with solid fundamentals and good growth prospects trade at P/E multiples that are near their historic lows. Gold miner stocks have taken a shellacking so far in 2012. Their charts have been ugly. For my preferred style of investing, though, these stocks are beginning to look quite pretty. Let’s look at five of the biggest gold miners:
- Barrick Gold (NYSE: ABX)
- Goldcorp (NYSE: GG)
- Newmont Mining (NYSE: NEM)
- Anglogold Ashanti (NYSE: AU)
- Yamana Gold (NYSE: AUY)
There are several metrics that we could use to evaluate the gold miners from a fundamental perspective. For this analysis, let’s focus on three: return on capital, debt/equity ratio, and free cash flow for 2011.
|Company||ROC||Debt/Equity||Free Cash Flow|
Anglogold Ashanti compares most favorably overall on these metrics with a strong return on capital and free cash flow as well as a respectable debt/equity ratio. I prefer companies with double digit returns on capital, so Barrick and Anglogold Ashanti make my cut. None of the five companies appear to have any yellow flags here, though.
Let’s look at how the five gold mining companies have grown earnings over the last 5 years and what industry analysts are predicting for earnings growth over the next 5 years:
|Company||Earnings Growth Rate - Past 5 Yrs||Est. Earnings Growth - Next 5 Yrs|
Mark Twain once said that history doesn’t repeat itself but it does rhyme. It certainly would be good news if his statement applies for these five companies. All of the gold miners have seen good annual earnings growth rates in recent years. If the analysts are right, they all should experience solid growth over the next 5 years also.
How attractively valued are gold miner stocks right now? Forward P/E and PEG ratios will give us a clue. Seeing how far the stocks are off their 52-week highs also provides a perspective. Here’s how the stocks stack up:
|Company||Fwd P/E||PEG||% Off 52-Week High|
The gold mining industry P/E ratio over the past 5 years has ranged from a low of 6.4 to a high of 25.9. Barrick is currently trading at a forward P/E lower than the 5-year low for the overall industry. Several of the others are near the lows.
Three of the companies have very low PEG ratios. All of the stocks are way off their 52-week highs. Once these stocks start climbing back, there is a lot of room to grow.
Sure, the prices of these stocks could continue to go lower. The overall market might see a multi-month correction that drags the gold miners down even more. Gold prices might continue to languish. However, these companies are sound fundamentally, have decent growth prospects, and are priced at multiples near 5-year lows.
We shouldn’t be in danger of these companies being value traps, either. These are five of the biggest players in the gold mining sector. It’s not likely that other companies will be able to steal large chunks of market share with the high capital costs needed to operate gold mines. Gold will always be in demand, just as it has for thousands of years. While predicting gold prices is tricky, it does seem unlikely that prices will collapse to a point to jeopardize the business models for these companies.
I lean towards Barrick Gold as the best pick of the group. Barrick is the largest gold miner in the world. It appears to have great potential to increase earnings over the next few years. And at a P/E of barely over 6 with a super-low PEG, Barrick looks like a tremendous value. Buy Barrick (and/or some of its similarly strong peers) and your investment accounts could show a pretty picture this time next year.
Keith Speights 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.