3 Stocks Worth Their Metal
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For years investors have made bets on the direction of metal prices. Some companies have used contracts to lock in the price of a metal for production. Sometimes speculators have used gold or silver contracts to profit from a move in the price of these commodities. While investors have been both benefited and burned by direct bets on different commodities, buying stock in companies that produce these metals is a different investment all together. In theory, certain companies should do better when the economy is in a slump, and we saw this clearly with gold producers racking up gains. Not all mining companies move in the same direction however, a company involved in iron production might see better gains when the economy is growing and demand is better. With all this in mind, I recently ran a screen using the Fool.com CAPS Screener. I wanted mining companies with at least 20% EPS growth, and at least 10% revenue growth, over the last three years. Three of the companies this screen returned give us a good cross-section of the metals and mining industry. Those companies are: Cliffs Natural Resources ), Iamgold Corp. ), and Pan American Silver Corp. ).
Cliffs Natural Resources:
A company like Cliffs might appeal to investors looking for exposure to an improving economy. The company primarily operates in the production of iron ore and metallurgical coal. Both of these commodities are demand driven by the strength of the economy. If the economy continues to recover and demand picks up then Cliffs will benefit. The primary attraction for investors in Cliffs has to be the stock's dividend yield. With a current payout of 6.17%, investors are being paid to wait. The stock also sells for a relatively cheap P/E ratio of about 8, and analysts are calling for earnings growth of about 7% in the next five years. If the company can continue to deliver on its dividend and meet earnings growth, investors might see a better than 13% total return per year.
There are two challenges to this theory. First, Cliffs has run into trouble meeting existing earnings expectations, missing estimates in three of the last four quarters. In addition, investors need to watch the company's cash flow situation. While Cliffs is investing for future growth, the company has been free cash flow negative. While this is not unusual in the mining industry, this could cause a worry about the stability of the dividend. Even with these concerns the company has maintained a relatively healthy balance sheet with a debt-to-equity ratio of 0.57.
Iamgold is more of a play on the gold industry, and I would make the argument that investors are better off buying a stock like this, than to make a bet on the direction of gold prices directly. The company pays a dividend of about 1.6%, which is something a direct gold investment does not offer. In addition, Iamgold mines for other metals as well like silver, zinc, copper, and more. This gives the company a bit of diversification. If you are an investor who believes that the economy could run into more trouble, Iamgold could be a good hedge against these problems.
The stock isn't cheap at about 14 times forward earnings, but many times mining company P/E ratios move in the opposite direction of normal companies. A mining company might have a higher P/E because they are coming out of a slower production time frame, and the P/E usually compresses as business picks up. This could be a good sign for Iamgold since the company's P/E ratio doesn't indicate peak earnings. In addition, Iamgold offers investors some safety in its balance sheet, since the company carries no long-term debt.
Pan American Silver Corp:
Pan American Silver is sort of a takeoff on the Iamgold stock idea, but with silver as the main commodity the company produces. Silver has been known as gold's cheaper cousin for a while. Again it's possible for investors to buy silver directly, but buying stock in a silver miner to me makes more sense. While Iamgold sells for about 14 times earnings, Pan American Silver sells for about 15 times forward estimates. The difference between the two is, Iamgold is expected to see some earnings compression over the next few years, while Pan American is expected to see 11% EPS growth. The company pays a dividend yield that is less than 1%, but again this is better than owning silver directly because there is at least some current income. The company has run into difficulties of its own meeting earnings estimates with two misses out of the last four quarters. Similar to Iamgold though, Pan American Silver offers investors a nearly long-term debt free balance sheet.
These three stocks give investors good diversification across multiple commodities and different economy scenarios. If you believe that the economy will pick up and better demand is on the way, then maybe Cliffs Natural Resources is the way to go. If you believe that gold will once again rally and the economy is still in for a rough ride, then Iamgold could be a good bet. Maybe you think that silver is a better hedge against inflation, if so then Pan American offers a good option. Whether you think the economy is going up or down, these three companies can help you solidify your position.
MHenage 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.