2 Silver & Gold Stocks to Buy, 1 to Avoid
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the past few months, gold & silver have seen tremendous leaps in value. While this has pushed many stocks near their 52-week highs, there is still more room for them to appreciate thanks to greater volume. Interestingly, the bull rise has actually overshadowed some of the growth stories behind emerging players.
In a recent investment report to clients, an analyst at Deutsche Bank gave a weakened outlook for Coeur d'Alene and Hecla. The analyst argued that, among other things, investors are getting weary of high operating costs, which will presumably cause them to exit stocks. In my view, this outlook is fairly accurate, considering that with the economy heading towards full employment, bets against inflation through mining are becoming less appealing.
Hecla trades at a respective 21.5x and 13.4x past and forward earnings while offering a dividend yield of 0.2%. It has more than double the volatility of the broader market, and is currently rated a 3 out of 5 on the Street, where "5" is a "sell." While liquidity is excellent at a quick ratio of 3.5x and a current ratio of 3.7x, growth doesn't justify the current valuation. In fact, analysts only forecast 4.9% annual EPS growth over the next five years, which is not nearly enough to drive value creation at a 10% discount rate. Considering that EPS growth was -1.1% over the last five years, the bar that has been set isn't exactly low.
In terms of hedging against macro uncertainty, Coeur d'Alene is more compelling than Hecla. Over the last six months, Hecla has returned 53.3% to shareholders; Coeur d'Alene has also been incredible with a 30.7% return. However, the latter still has a high growth trajectory ahead, with forecasts for double-digit gains over the next five years. But this is a major turnaround from the past five years that appears to be largely factored in, given that shares are now almost double the 52-week low and only 6.4% below the 52-week high, with a beta of 1.8.
As the biggest domestic producer of silver, Coeur d'Alene has done well in recent quarters to showcase production power to shareholders. Excellent results in the second quarter were complemented by the implementation of a share repurchase program that mitigates risk for investors. Moreover, silver production has gone up by a CAGR of 17% over the last 4 four years, while gold production has gone up by a CAGR of 68%. At the same time, capital expenditures have been held under control to generate high free cash flow. At a PEG ratio of 0.62x, the future has been overly ignored.
Silver Wheaton's (NYSE: SLW) Growth Story Makes It A "Buy" Despite High Multiples
Silver Wheaton may look expensive at a respective 24.3x and 17.7x past and forward earnings, but there are multiple reasons why analysts rate it a "strong buy." For one, the company has delivered transformative EPS growth over the past five years and is still forecasted for 36.6% annual growth over the next five! As high as the PE and forward PE multiples are, the PEG ratio of 0.66 really puts matters into perspective.
Like many basic material stocks, shareholder value has soared since around mid-July. In Silver Wheaton's case, the stock has gone from around $25 to $40. Fortunately, it has been more than a movement in the price of precious metals that have driven value. The company has more than $1 billion in cash (and more coming from operations) to spend on takeover activity. It has a solid history of acquiring businesses that were accretive to investors by mitigating risks. With fixed production costs that can be spread across more assets, the company will be able to further increase margins. Accordingly, I recommend buying shares to capitalize on this impressive growth story.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Hecla Mining Company. 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.