Plenty of gold stocks are up 200 or 300 percent since January, leading some investors to believe they may have missed out. But Louis James, senior investment strategist at Casey Research, thinks it’s not too late to make profits.
The Investing News Network had the chance to chat with James after his talk on the subject at the recent Sprott Natural Resource Symposium in Vancouver. Some of the points he made included:
- It’s not too late; “You can’t chart your course forward by looking in the rearview mirror … The question you have to be asking yourself is, what is coming next?”
- Commodities move together; “The commodities supercycle has really carved out a bottom. And this is something that, I think, if you’re nervous, you’re not sure what’s happening next, it’s something you can take significant comfort in. This is a very big mega trend.”
- Where to look; “Probably sort of the biggest opportunity, in terms of a hunting ground for people who are looking for stocks that have not already gone crazy, is to look at the earlier stages.”
Casey also shared the names of a few stocks he likes at the moment. Listen to the full interview, or read the transcript below, for more of what he had to say:
INN: Hi, I’m Teresa Matich with the Investing News Network. Here with me today is Louis James, senior investment strategist at Casey Research. Thanks for joining me.
LJ: Happy to be here.
INN: So your talk at the Sprott Conference that we’re at right now was entitled, ‘It’s not too late.’ Can you tell us a little bit about that?
LJ: Well, obviously, with the run up that we’ve had in gold and the huge increase that we’ve seen in stocks in this precious metals space, a lot of people are asking themselves this question, ‘have I missed it? Everything is up so much, is it too late?’ And the answer is that you can’t chart your course forward by looking in the rearview mirror. You can’t just say, it’s up so much, therefore, it’s too late. The question you have to be asking yourself is, what is coming next? To answer is ‘it too late?’ you need to know ‘is all the value already priced in? What’s going on in the world? What do the fundamentals say? What do the technicals say?
And the answer is, in my view, it’s not too late. We had a market that was way oversold. It’s recovered. So it’s not on the deep, deep discount rack anymore. The question now is, what’s happening going forward?
So congratulations to the people that had the courage to buy last year. They’re all happy campers now and it’s wonderful for them. But there’s still a lot of money to be made. I guess to summarize the key point from my talk would be that, as most people in the resource sector know, commodities move together. There is a very, very high correlation between them. Not on a day to day basis, but on an ongoing basis, they correlate very highly, and that includes the precious metals.
There are times when precious metals will diverge. There are world events that stress the economy and so your industrial metals will go down and gold and silver will go up. Those tend to be short term. But the mega trends, the big cycles, super cycles that people like to talk about, the commodities move together, including precious metals. And we’re seeing a major bottom turning type event in the commodities super cycle. And it’s not just gold that’s up this year. Silver’s up more than gold. Oil is up more than gold. Zinc is up more than gold. Sugar is up more than gold.
LJ: So the commodities supercycle has really carved out a bottom. And this is something that, I think, if you’re nervous, you’re not sure what’s happening next, it’s something you can take significant comfort in. This is a very big mega trend.
INN: Right. Yeah, I think people need comfort because all these fundamentals make sense to a lot of people but when you’re looking on all the stocks are up two hundred, three hundred percent, psychologically it’s hard to jump in at that point. So what would you say to investors who are trying to overcome that?
LJ: Well, first and foremost, again, just because something’s gone up doesn’t mean it can’t go up more. And you don’t want to feel like a sucker, you don’t want to feel like the one who came late and you’re the one who’s buying high to close out the deal for the people who bought low. But you have to be forward looking. What do I think is going to happen next? Where are things going? So that’s really the real answer.
But, of course, there are also opportunities. The market doesn’t always correctly identify all stories. There are some cases where things haven’t risen as much as others because, in some cases, they shouldn’t. They have problems. They have political trouble in the country they’re operating in. Sometimes it’s a misunderstanding. Sometimes the company has changed and the market hasn’t recognized the change. Sometimes some flamboyant media personality has made a big mission about criticizing some company and it’s hurt the stock. But you make your own independent judgement whether that criticism is accurate and is there an opportunity there.
Probably sort of the biggest opportunity, in terms of a hunting ground for people who are looking for stocks that have not already gone crazy, is to look at the earlier stages. The way the money comes into resource sector, first it goes to the profitable producers and then it goes to the companies that have made the discovery and they’re developing a mine or oil field or whatever that looks like it’s going to make a lot of money. And then finally, at last, it gets to the grassroots. It gets to the early stage exploration. So there’s still quality companies out there doing exploration work that have not gone up four fold. Everything is up somewhat, if it has any merit at all, even just good people in the company, everything has gone up somewhat. So you need to get over that hump. Understand that no, you’re not going to buy at the bottom, it’s behind us.
What I’m saying though, is if you’re looking for maximizing gains, if you go to the earlier stage companies, there are still opportunities there that could easily be five, ten baggers if they deliver what they’re working on. If you’re more concerned with wealth preservation,you probably want to stick with the producers because as prices continue to rise their profits should continue to rise, and the market will reward that.
INN: Yeah, and even the producers are up substantially so far.
LJ: Yeah, isn’t it amazing that—not just producers, there are junior producers and major producers. A junior isn’t just an exploration company, it’s a small company and there are small producers. But the big boys, the Barricks (TSX:ABX) of the world, for Barrick to rise a hundred percent in six months, you know, that is astounding.
And that just tells you how oversold was, and that’s not going to happen again. Gold went up two hundred and change per ounce. If it goes up another two hundred and change per ounce, Barrick’s not going to double again. It went from way oversold to now, not overvalued but—I don’t want to call it reasonable because I still think that the sector is still on the discount rack as a whole. Things are not really where they should be yet. But they were so greatly oversold, people were so disinterested in resources that the rebound from that rock bottom was enormous and bully for those who took advantage of it.
INN: And then, conversely, one might feel like you can look at the space and kind of close your eyes and pick any stock and you’d do well. But that’s never really been a good idea for an investor, so how can investors also be wary and ensure that they are getting into these quality stocks that you’re talking about and not the alternative?
LJ: Yes, a rising tide does tend to lift all ships. Even the ones with holes in their hull will initially float up for awhile, but the water starts filling in pretty quick. It’s actually not as hard as it sounds.
We all know which companies were still making money. Like the producers, we know which ones were still profitable last year and which ones weren’t. And so the ones that were able to make money last year, unless they go gonzo spending money now that the market is up, they’re going to make more money. And you can just look, what are they doing? Are they sticking with their knitting, doing what they do best? What do their Q1 and Q2 quarters look like this year? And if they’re making more money, it’s pretty obvious, this is not rocket science, anybody can do this.
As far as earlier stage stuff, we have the famous Doug Casey’s Eight Ps of Resource Stock Evaluation, and the first P is people. It’ll be a longer talk than we have time for to get into all the details of the eight Ps but this is—again, something that any investor can do from their home—is look at the people, go to the website, look at the page for management and directors and see who the names are. If you know them or if you look from their bios, are they associated with success stories in the past? And if not you can Google them. What comes up, a bunch of other successful mining stories from the past or a bunch of lawsuits? Anybody can do this, right?
INN: Are there any quality stocks that you’re watching or you’ve invested in that you can tell us about today?
LJ: You want individual stock picks?
INN: That’s what we all want, like Rick said, we want the fish served up on a platter!
LJ: Of the majors I’m liking Barrick and Newmont (NYSE:NEM). They both have done a lot of work to clean up their balance sheets. These guys have the resources to really go after the new crown jewels and stuff, so that’s interesting. I like those.
Agnico’s (TSX:AEM) probably been my favorite of the big ones for a long time. Because they’re just really quality guys, they didn’t screw up the way the other ones, you know, got overboard, with the hedges or the buying assets all over the place without really keeping control of their costs. Maybe since it has less recovery that puts less spring in the upside? I’m not sure, I don’t want to criticize them. I like the Agnico guys a lot. But Barrick and Newmont are fixing their—they’re on the mend and that adds a little extra sparkle, if you will.
But the other thing on that is that because of this retrenchment and because the companies stopped spending on exploration, not entirely but to a great degree, they’ve pulled in their horns, spent a lot less money on exploration, I think we’re going see a real uptake going forward in M&A on acquisitions. So the quality development stories, the people that are building mines that have full feasibility studies or very high quality pre-feasibility studies with credible numbers, high returns.
Now those are interesting projects right now, there are not a lot of them out there. Kaminak was one of our picks. That one’s gone, but I think there’s other things that are looking interesting like that out there shaping up.
One of my favorites is Pretium (TSX:PVG). You know, monster sized, high grade. It’s one of those ones that’s discounted because of the perceived technical risk, but it’s so rich. As soon as that risk starts coming off I’ll be surprised if they’re not taken over, even if they are expensive. There’s just so much upside and it’s so rich.
And then, earlier stage, I like the prospect generators with proven management teams. And I like the prospect generator/JV model because it puts other people’s money to work on our behalf. I know that you give away a substantial portion of the asset when you get other people’s money for it, but exploration is hard.
Most of the time it doesn’t work even for the best people. That’s just the way it is. Most of your exploration targets will not work. The one that does adds huge value and makes up for all the rest but most of them won’t work so if you’re spending all your own money doing this, you’ll run out of money pretty quickly, and you have to dilute the heck out of your shareholders. So the prospect generators put other people’s money to work in doing this high risk exploration work. And then they get to hold on to 20, 30, 40 percent, depending on the deal, of a discovery.
That’s a very sensible business plan and there are people doing this like Almaden (TSX:AMM), well it’s Almadex (TSXV:AMZ) now is there prospect generator, you know the Poliquins, they’re serially successful, great guys, real prospectors. I like them a lot. I like Renaissance Gold (TSXV:REN), Ron Parratt, the AUX success story. Remember we talked about people that first P and who’s been successful out there. There are a lot of prospect generators and, again, since you’re not looking at something with the bird in the hand looking at the people first is the way to pick the best ones.
INN: Certainly some good food for thought. Thank you for joining me.
LJ: Happy to be here again.
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Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.