Gold has been a safe haven for investors for the last ten years. With the market’s unpredictable behavior, conservative investors went to cash and gold because of their perceived safety. As a result of this movement, in addition to increases in reserves in China and India, the yellow metal now trades at all-time highs.
With the recovery underway and the market coming off its best September in more than 70 years, the question is now, “Is gold a good buy today?”
This week, we’ll look at the best and worst gold mining companies to see if there are any plays you should be making now to profit from the gold rush.
There are a couple of ways to buy gold. You can buy coins and bars — actual gold pieces — that you can sell at a later date (hopefully at a higher price) or you can invest in companies that mine gold and transport it to market.
I favor the latter option because it seems less risky than keeping a pile of gold in your home or safe deposit box. So let’s take a look at the mining industry and find what the best and worst buys are right now.
What many people don’t know about metal and mining companies is that very often it’s not just the products that are dependent on commodity prices. You see, many of these companies use a host of other raw materials to extract and refine their products, meaning that when the prices of other commodities rise, the cost of doing business rises, as well.
So, if a mining company has a lot of fixed costs, like machinery, it will see profits rise as the price of its products rise. If a similar company has more variable costs, like chemicals for extraction of metals, it leads to lower (and sometimes declining) profit margins. For this latter type of company, it doesn’t matter how valuable its product is, if costs are rising faster, its profits will decline.
With the price of gold and other metals rising, right now it is better to own shares of a company with fixed costs. When the opposite is true and costs are decreasing, you should do the opposite and own companies with greater variable costs that allow the company to boost profits.
You have to decide where you think the price of gold is going from here, but I will give you the names of two top-rated companies with working business models right now and two companies that aren’t making the grade. I think buying selectively in gold and commodity companies is a good bet right now given that gold is breaking new highs.
Here are two of my favorite metals and mining stocks:
Taseko Mines (AMEX: TGB) has been around since 1966 and is based in Western Canada. The bulk of its operations are in gold and copper. The company has blown away earnings estimates in the last two quarters by more than 300%. Its next report should come out in early November, so if you’re going to buy, do so before that time.
Newmont Mining (NYSE: NEM) is a Colorado-based company that currently receives an overall grade of B in my Portfolio Grader stock-rating tool. The stock has moved in fits and starts this year, but currently it is up 30% year-to-date. Earnings estimates are on the rise and analysts expect NEM’s profits to increase 19% year-over-year next quarter. I like where the company is going and it could be a worthwhile buy ahead of its earnings report.
Here are two metals and mining stocks you should avoid right now:
Gammon Gold (NYSE: GRS
) may also be located in Canada, but it is a far cry from the company TGB has built. GRS operations are primarily in Mexico, where ongoing labor disputes have forced the company to shut down many of its mines. The situation and rate of production are too unstable right now for me to recommend that you invest in this company.
Qiao Xing Universal Resources (NASDAQ: XING) is the only F-rated metals and mining stock in the Portfolio Grader Database and one you should definitely avoid. The company used to operate in the telecommunications business, but in the last three years it shifted its focus to natural resources. With the way technology and telecom companies have rallied this year, it would seem that the company made a big mistake. Until the company gets more experience in its current venture, I would say to stay away from this stock.
As of this writing, Louis Navellier did not own a position in any of the stocks named here.
Top 5 Stocks for the 4th Quarter Surge. Louis Navellier details five stocks set to deliver record earnings and jump 30%-50% in the next 90 days as the big money piles in. Get their names online here, including Louis’ buy-below and target prices.
