by Tim Melvin | April 28, 2014 1:50 pm
Walter Schloss took the lesson he learned from Ben Graham and used it to compile one of the most outstanding track records in the history of the financial markets.
Schloss averaged close to 20% annually for nearly 50 years by sticking to just a few simple rules he learned from the father of value investing. He bought stocks for less than book value and favored companies with strong balance sheets that could survive until they thrived.
He favored companies with relatively low levels of debt and high current ratios that provided an adequate margin of safety in the balance sheet. And, of course, he liked to buy stocks when they were trading near multi-year lows and grossly out of favor with the general investment community.
It is a relatively easy thing to screen for stocks that might have appealed to Mr. Schloss. I screened the markets this morning for stocks trading below book value, near three-year lows with low debt and high current ratios. It is an interesting list of stocks, but one thing leaps off the page when I saw the results. Mining stocks, especially silver and gold miners, are incredibly cheap right now. They are trading well below book value and very close to long-term lows.
Let me be the first to admit that I have never traded the metals markets and have very little understanding of the precious metals supply and demand factors. However, I can look at the miners through the same lenses I use on any other business and see that they are cheap at current prices.
Coeur Mining (NYSE:CDE) is currently trading at just 50% of tangible book value and only 6% above the three-year lows. In fact, CDE stock is actually less than 4% off its five-year lows at the current price. The debt to equity ratio is just 0.24 and the company has a current ratio of 3.37. Coeur has more than $200 million in cash available right now and should be able to survive until silver prices finally begin to rise again.
CDE stock was trading for more than $30 per share as recently as 2012 and has traded above $70 a share in the past decade. When metals prices eventually rally we should see Coeur shares recover a good deal of the lost ground and provide investors with outstanding long term returns.
AuRico Gold (NYSE:AUQ) is a Canadian gold producer with mines and projects in North America. The company’s core operations include the Young-Davidson mine in Ontario, Canada and the El Chanate mine in Sonora, Mexico. The stock is currently trading at just 70% of tangible book value and is trading near long-term lows.
AUQ stock is currently just 23% off its three-year lows. The balance sheet is in decent shape, with a debt to equity ratio of just 0.14% and a current ratio of 3.5. Shares of AUQ stock trade hands at just about a third of the 2011 highs and even a partial recovery in gold prices should take the stock a lot higher.
I have no idea when or why gold and silver prices will rally in the future. But I’m confident that, at some point in the next five years or so, some economic or geopolitical event will cause a major rally in precious metals prices. When that happens, investors who buy the miners at the current depressed valuations should be able to reap enormous profits.
As of this writing, Tim Melvin was long CDE.
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