Investing in Gold: 2 Stocks to Buy, 1 to Avoid

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Several economies around the globe have started showing signs of recovery, thanks to their stimulus packages. However, long term investors still need to be cautious, as the economic recovery is coming at a cost. The Fed’s $40 billion per month purchases of mortgage backed securities may have rallied the market, but it poses serious threats of hyperinflation. Economic risks appear to be increasing, which is pushing up gold prices. India, which is one of the largest gold importers, accounts for 20% of the global demand for the precious metal. It was recently released that Indian gold demand rose by 9% in September YoY. In my opinion, long term investors can capitalize on the current economic scenario by investing in gold mining companies.

<img src="/media/images/user_13723/gold_large.jpg" />

(From the attached daily Gold chart, we can see that the gold prices have risen nearly 15% since the lows it created in June)

Goldcorp (NYSE: GG) recently reported quarterly net income of $498 million (including onetime items), up from $336 million, an increase of 48% YoY. Excluding onetime items, earnings stood at $0.54, beating the street’s estimates of $0.46. Goldcorp also reported record quarterly revenues of $1.5 billion, up 18% from the last year’s quarter. The company has a low debt/equity ratio of 3% and a net profit margin of 29.9%.

The company’s Penasquito mine saw a production increase of 125% and the Los Filos mine production rose by 8.8%. The management at Goldcorp announced that it would be increasing gold production from Penasquito and Red Lake mines in the coming quarters, and that it expects to initiate gold production from Pueblo Viejo and Cerro Negro mines by the beginning of 2013. With gold prices above the $1700 mark, ramping up production levels could mean a profitable ride for investors.

Despite the rising gold prices, Barrick Gold (NYSE: ABX) seems to be struggling with profitability. Quarterly revenues dropped from $3.97 billion to $3.43 billion YoY and the net income stood at $618 million, down from $1.34 billion YoY. The management of the company stated the disappointing numbers were due to lower realized gold prices and increasing operating costs at its Australia-Pacific and African Barrick Gold operations. Management also said that it would be putting a hold on the company’s spending plans worth $1 billion, planned for the next year. In my opinion, investors should wait for a positive trigger to buy this company.

Gold streaming companies like Sandstorm (NYSEMKT: SAND), do offer quicker and greater gains than gold mining companies, but their business operations are highly leveraged. Also investors need to understand that consolidating (non-trending) or falling gold prices negatively impacts the profitability of such companies.  However, streaming companies do not involve operational risks involved in mining like the collapse of a mine or an explosion.

If the risks and rewards associated with streaming companies are acceptable, then in my opinion, investors should be looking at Sandstorm Gold. The company recently reported record quarterly revenues of $15.1 million and operating cash flows of $10.6 million. Sandstorm has cash reserves in excess of $150 million, and the CEO of the company announced that it would be looking to acquire additional gold streams. The company operates with little or no debt, with a quick ratio of 15.74x along with a huge pile of cash reserves, Sandstorm Gold could make strategic acquisitions without any debt repayment issues. In my opinion, investors should look to invest in Goldcorp and Sandstorm as both companies offer huge potential upside in the near term future.

 

 

 

 


PiyushArora 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

 
 
 
 
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