Misfit Stocks
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I'm a baseball fan and one of my favorite lines is in Moneyball delivered by Peter Brand (Jonah Hill): "I believe there is a championship team that we can afford, because everyone else undervalues them. Like an island of misfit toys." Labeling gold stocks as misfits may be a stretch but one could argue that they are harshly undervalued.
Global economic stimulus seaping through the economies of Europe, China and very possibly moreso in the US very soon has created a breeding ground for commodities - mainly gold - to flourish. Indeed, some - including commodities broker Bob Haberkorn cited in The Wall Street Journal - are placing bets that gold will reach $2,000 per troy ounce in 2012, and the precious metal has already achieved a six-month high in recent days.
This has gold mining companies with access to productive mines very comfortable despite the fact that stock prices have not kept pace with the actual commodity.
Barrick Gold (NYSE: ABX), for instance, has seen its stock tumble some 16% year to date. Rival Goldcorp's (NYSE: GG) stock's plight has been less severe and is down 7%. Traders may have to endure further downside in the short term but valuations are likely to correct in the long term, experts say, which is the type of view that gold CEOs are taking.
It takes years of gold exploration and mining for gold mines to begin producing. A mine life can last for years and as a result gold companies take a long-term approach to investing in them. Perhaps this is the way that equity investors need to approach gold stocks.
First, miners are not just stumbling across and producing high-quality mines. They're not that easy to find. That supply scenario combined with soaring demand given the global economic and political uncertainty has the formula to continue to drive up gold and equity prices and close the gap with the commodity and stocks.
If would-be gold stock investors are instead choosing to flock to ETFs or to invest in physical gold what they miss are dividend distributions. Goldcorp, for instance, has raised its dividend three times in the past two years and is among the sectors leaders in directing cash flow to investors.
Barrick Gold is similarly on the dividend path and Jamie Sokalsky, the company's recently appointed leader, is looking for ways to return more capital to investors. The mining company has increased its dividend some 260% over the past six years.
As Barrick Gold continues to generate more cash flow, which is what it expects to do with two new mines beginning production soon with an expected mine life of a quarter of a decade, at least - it is exploring a possible share buyback or lifting the dividend payout, Sokalsky told CNBC. If the company goes the dividend route, investors could be in for an increase in 2014.
Of course, with market values suppressed it's harder to appreciate a dividend payout. But considering gold stocks are undervalued there should be upside potential.
Not all gold stocks, of course, are 'misfits.' Investors are a bit more bullish on Randgold (NASDAQ: GOLD) these days. The stock has soared some 40% since its mid-May low of about $73 per share. Year to date the stock is up only modestly but has posted gains of about 9% since September 4th, when traders were buying options contracts and betting the stock had another 5% to rise by October expiration, according to CNBC.
If history is any teacher, further monetary action via a third round of bond buying could be the catalyst that sends the price of gold over the $2,000 per troy-ounce level. After all on the heels of QE2, it was all the markets needed to send the price of the precious metal to never before seen levels at the time. Whether it will be enough to lift the valuation of gold stocks, however, remains to be seen. Nevertheless, it wouldn't be unaffordable for many investors to comprise a team of undervalued, misfit gold stocks and still have a championship portfolio.
GerelynT 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.
