I think it is just a matter of time before investors wise up to the growing deep value appearing in gold stocks
. How long? Well I don't know, but what I do know is if gold breaks above $2000 an ounce and silver $50 then gold stocks will not be trading at their current levels. Rather they will be trading materially higher. Of course all that one needs to establish is whether or not precious metals will move materially higher over the coming months. I think that they will for a number of reasons, namely a break down in confidence with government debt. Anyway the point of this article is not so much to argue the case for precious metals rather to point out my top three gold stocks picks. In essence I am looking for the top three gold stocks with a market cap over $2bn which show the best fundamental value, low financial risk, and relative performance. My criteria is as follows:
1. Forward P/E - < 15x
2. Price to Book - < 3x
3. Return on Assets > 5%
4. Debt to Equity < 0.5
5. Stock price trading above 50 and 200 day MA
The three stocks that pass all five criteria are Newmont Mining (NEM), Yamana Gold (AUY) and AuRico Gold (AUQ). Out of these three Yamana (view chart here) was the top pick and yes it is now moving rapidly to the upside!
In our Global Macro we have about a 30% exposure to precious metals (platinum and silver) and gold stocks. In addition clients have a reasonable exposure to LEAPS calls on Yamana (AUY) and we will look at getting them into call options on Newmont (NEM) over the coming days. Newmont is particularly interesting because its earnings outlook continues to improve and given that its stock price hasn't really gone anywhere over the last 6 months it just gets cheaper and cheaper! The chart below gives the forecasted EPS (top) and sales per share (bottom). How long can EPS forecasts continue to rise and the stock price go nowhere? Well I guess it is just a question of time before the stock price plays catch up!
I think any long-term portfolio should have at least a 10% weighting to precious metals and gold stocks. It has been a long wait with respect to gold stocks but I am sure the wait will be very rewarding over the coming weeks.