Silver Standard Resources Inc. (USA) (NASDAQ:SSRI) had a great first quarter, increasing earnings per share 54.5% from last year, and beating analyst’s forecasts. President and CEO Paul Benson noted that this was this sixth quarter in a row that SSRI increased its cash position.
Yet the stock is up only 9.4% year-to-date. And SSRI stock is still 38% off its 52-week high. Investors might be ignoring this stock at their peril, since silver will probably do well in the years to come.
Here are some reasons to buy Silver Standard Resources stock after earnings.
Reason No. 1: SSRI Stock Fundamentals
First, Silver Standard Resources stock looks great, and this is with a low price of silver; silver is about two-thirds down from its 2011 peak. Imagine what would happen to SSRI stock if silver saw 2011 prices again!
Silver Standard has low debt, and its current ratio has increased, signaling improving liquidity. SSRI also has a high Piotroski F-Score, suggesting a strong financial position.
And SSRI is conservatively valued. It trades at 2.24 times cash, 8.68 times free cash flow and 1.3 times book value.
Reason No. 2: Trump/Inflation
The yield curve recently flattened, signaling lower inflation expectations, but I think it would be foolish to rule out the possibility of inflation over the next few years. The past two presidents have increased the national debt, and the Donald Trump administration will probably also run budget deficits.
His plan to cut taxes will probably increase the budget deficit, at least in the short run. Budget deficits lead to a growth in the money supply, causing inflation.
During times of inflation, it’s best to put money into hard assets, such as gold and silver. It’s easy for the government to increase the money supply — all it has to do is run the printing press — but the government can’t make silver appear out of thin air.
Gold and silver did well during previous periods of high inflation, such as the 1970s. Under the post-World-War-II Bretton Woods monetary system, gold had been convertible at a rate of $35 per ounce. But Nixon closed the gold window in 1971, and the spot price for gold went through the roof, going as high as $850 an ounce in 1980.
But why silver and not gold? Well, Jim Rogers, one of the greatest investors of all time (his portfolio rose 4,200% from 1970 to 1980), said earlier this year that silver is cheaper than gold relative to historical levels. He is right; the silver to gold ratio has historically averaged 15 to 1, that is 15 ounces of silver per ounce of gold, but now it is over 70.
The price of silver will probably go up, which will be good news for Silver Standard Resources.
Reason No. 3: Strong US Dollar
In April, Trump called the U.S. dollar “too strong” — while the U.S. dollar has been higher in the past, it has appreciated 24.3% in real trade-weighted terms since July 2011. The dollar has been trending upwards for about six years now; previous dollar rallies lasted just under seven years. It might be time to diversify into other currencies.
And other currencies, such as the Canadian dollar and the Argentine peso, look cheap. The Canadian dollar hasn’t been this cheap in 13 years.
The Argentine peso is also low.
How does this apply to SSRI stock? Silver Standard Resources is a Canadian company, with a gold mine in Saskatchewan and a silver mine in Argentina. In its Annual Report released in March, Silver Standard Resources cautions investors that:
“Any decrease in the Canadian dollar or Argentine peso against the U.S. dollar will result in a loss on our books to the extent we hold funds or net monetary assets denominated in those currencies. As a result, our financial performance and forecasts may be significantly impacted by changes in foreign exchange rates.”
If this is true, the reverse could be true as well. SSRI may hold Canadian dollars and Argentine pesos, and an increase in these currencies against the U.S. dollar would boost Silver Standard Resources stock.
As of March, the real broad effective exchange rate for the Canadian dollar was 81.59, 6% below 86.8, the average since 1994. The average since May 2007 is 94, and the Canadian dollar is 15.2% below this.
Reason No. 4: Improving Macro Environment in Argentina
Mining companies like Silver Standard Resources must pay attention to country risk, since if things fall apart, they could lose their mines. As risk increases, more and more investors will stay away from the stock, pushing it down.
One of SSRI’s projects is the Pirquitas mine in Argentina, which produced 10.4 million ounces of silver last year. Argentina has had a rocky past, with military coups, populist leaders, hyperinflation and balance of payments crises
But Argentina looks like it is turning a corner, and showing signs of improvement. While populism engulfs most of the developed world, it appears to have run its course in Argentina. In late 2015, Argentines elected Mauricio Macri, a reform-minded civil engineer, to succeed the populist Cristina Fernández de Kirchner, the previous first lady.
Macri took office early last year, and Wikipedia describes him as “the first democratically-elected non-Radical or Peronist president since 1916.” Macri began reforming the economy, and this does not appear to have impacted his approval rating, which still stands at 50%.
And from 2010 to 2016, Argentina moved up 12 places in the World Justice Project’s Rule of Law Index.
Argentina’s economy looks like it is getting stronger. The country has suffered balance of payments crises in the past, but Argentina is now on a firmer financial footing. Last October Argentina’s foreign currency reserves exceeded $40 billion for the first time since April 2013. Earlier this year, both Moody’s and Standard & Poor’s upgraded Argentina’s credit rating. And although Argentina’s economy shrunk in 2016, the poverty rate actually fell in the second half of the year.
And what does this mean for Silver Standard Resources? An improving macro picture in Argentina makes the stock less risky for investors, who will hopefully be more willing to buy SSRI stock and drive the price up.
As of writing, Lucas Hahn was long SLVP (which owns SSRI shares) and PPLT.
