by Jeremy Jones | March 25, 2014 9:52 am
Although the market is basically flat YTD, there is rampant speculation bubbling under the surface. The bubble conditions in the market are best captured by the ratio of the speculative NASDAQ composite index to the blue-chip Dow Jones Industrial Average. Our chart shows one of the most speculative markets in over a decade.
Unless you are taking a reckless amount of risk, chances are the hot money crowd is leaving you in the dust. That’s fine, if temporarily unpleasant. You don’t want to chase performance in a speculation-driven market. Enduring periodic bouts of discomfort (read: lagging performance) is what enables savvy investors to generate the long-term returns that trump those of the average investor.
Savvy investors don’t settle for the cards the market has dealt. Rather than trying to time the rise and fall of Tesla (TSLA), Apple (AAPL) or other speculative stocks that have become a dominant force in the U.S. stock market, they craft a portfolio of high-dividend paying companies and focus on those dividend payers that are out of favor.
What securities are out of favor today? Anything related to precious metals is viewed as ghastly and grizzly by institutions and individuals alike. Precious metals stocks have taken a savage beating, both on an absolute basis and relative to gold. The Market Vectors Gold Miners index is down over 60% from its highs in 2011 and almost 50% since year-end 2012. There isn’t a more out of favor sector in the market…creating opportunity for those investors willing to lean against the crowd.
Agnico Eagle Mines (AEM) is a mid-size gold and silver producer with seven mines that are 100% owned and located in mining-friendly regions of Canada, northern Finland, and northern Mexico. Sixty-two percent of Agnico’s assets are located in Canada, 20% in Mexico, and 16% in Finland.
Click to Enlarge At year-end 2012, Agnico’s proven and probable gold reserves amounted to 18.68 million ounces of gold and 95.5 million ounces of silver. In 2013, Agnico Eagle produced over one million ounces of gold. Over the next two years, Agnico expects to increase production by 16% to more than 1.2 million ounces.
Agnico is one of the lower-cost gold producers, with 2013 cash costs of $690 an ounce and all-in costs of $1,025 per ounce. If gold prices stagnate, the lower-cost producers that can increase production are likely to be the best-performing stocks in the gold mining sector. Dividend-paying gold miners are also likely to outperform in a flat gold market. Agnico has a strong commitment to returning capital to shareholders. It has paid a dividend every year since 1983. Our price chart shows that Agnico shares are on the verge of an upside breakout.
Like all of the precious metals, silver is also out of favor with investors. The Commodity Futures Trading Commission Commitment of Traders report shows that the net speculative long positions in silver futures is near historical lows. That signals speculators are bearish on silver which is a bullish contrary indicator.
Fresnillo (FNLPF) is the world’s leading silver mining company and Mexico’s second largest gold miner. Fresnillo came public in 2008 with a listing on the London Stock Exchange. The company is headquartered in Mexico—the top silver producing country in the world. Fresnillo’s assets include the largest primary silver mine in the world and the largest land area for precious metals concessions in Mexico.
Fresnillo’s silver mines are some of the lowest-cost mines in the world. According to CRU, a metals consultancy, Fresnillo’s mines are in the lowest quartile amongst its peers. The company’s gold mines are also some of the lower-cost mines in the world.
Pan American Silver (PAAS) is the second largest primary silver producer in the world. The company has seven operating mines in Mexico, Peru, Argentina, and Bolivia with development projects in the U.S., Mexico, Peru, and Argentina. In 2012, Pan American Silver produced 25.1 million ounces of silver and 112,300 ounces of gold. Pan American’s proved and probable silver reserves total 317 million ounces of silver and 2.4 million ounces of gold.
Like Fresnillo, Pan American has a strong balance sheet with a net cash position equal to almost $3 per share versus a price per share of $13.50. Pan American also has a generous dividend policy and an industry-leading yield of 3.60%. While we wouldn’t rule out the prospect of a dividend cut if silver prices remain depressed, management is committed to returning capital to shareholders.
Jeremy Jones, CFA, is the editor of Young Research’s Global Investment Strategy and the Director of Research at Young Research & Publishing Inc., a financial, economic, and monetary research firm which also provides the research for Richard C. Young’s Intelligence Report. Global Investment Strategy helps investors profit from opportunities in stocks, bonds, currencies, commodities, and special situations across the global investment landscape.
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