At the start of the novel coronavirus pandemic, the fundamental case for gold stocks made tremendous sense, even if the technicals weren’t in sync. Although we’ve witnessed many fear-driven events over the past few decades, arguably none were as frightening as this crisis. Nothing chills to the bone quite like an invisible killer.
For a month or so after the coronavirus shuttered the U.S. economy, gold stocks became much more intuitive. Not only did the argument make sense but other investors piled in, driving up prices for both the metal and the broader mining complex. After years of frustration, it appeared that gold bugs would finally have their day in the sun.
Alas, it was not to be. In recent weeks, two major announcements shifted investor sentiment back toward a more risk-on profile. First, the May jobs report indicated that the economy added 2.5 million jobs, repudiating the calls for doom and gloom. Second, the Commerce Department released its U.S. retail sales report, which showed nearly an 18% increase from April to May.
Without consumer fears, the case for gold stocks to buy was poised to fade away. However, investors shouldn’t be too quick to abandon the metals market. Primarily, initial weekly jobless claims continue to number in the millions, suggesting that our economy still has a long way to go. Additionally, coronavirus hot spots have sprouted in Florida and Texas, raising alarms about a possible second wave.
To protect yourself against the unknown, investors should consider these gold stocks, which are broken down into investing-style categories: streaming and royalty companies, fiscally stable firms, value plays, and — my personal favorite — speculative bets.
- Wheaton Precious Metals (NYSE:WPM)
- Franco Nevada (NYSE:FNV)
- Royal Gold (NASDAQ:RGLD)
- B2Gold (NYSEMKTS:BTG)
- Kirkland Lake Gold (NYSE:KL)
- Kinross Gold (NYSE:KGC)
- Eldorado Gold (NYSE:EGO)
- Caledonia Mining (NYSEMKTS:CMCL)
- Sandstorm Gold (NYSE:SAND)
- Sibanye Stillwater (NYSE:SBSW)
Of course, there are no guarantees in any market so you should apply a discipline approach here. Nevertheless, with much of Wall Street not appreciating some of the negative signals ahead, these 10 gold stocks may provide a critically robust hedge.
Gold Stocks: Wheaton Precious Metals (WPM)
Typically, when investors think about gold stocks to buy, they gravitate toward potential ten-baggers. But if you’re interested in the metals complex for the long haul, you should consider streaming companies like Wheaton Precious Metals. Unlike direct mining plays, Wheaton provides funds for producing mining projects in exchange for some of the production. In this way, WPM stock takes some of the volatility out of this oftentimes unpredictable sector.
Essentially, with Wheaton, investors have some measure of cost predictability. Because the contracts are settled ahead of time, you know what you’re getting. During either down periods or extended choppy sessions, WPM stock provides greater stability relative to other gold stocks. On the flipside, you won’t get the explosive gains associated with speculative miners striking it rich.
Nevertheless, WPM stock has offered tremendous capital gains while preventing some of the stomach-churning losses inherent in other precious-metals-based investments. Therefore, even gun shy buyers should consider taking a long look at Wheaton.
Franco Nevada (FNV)
A well-known name among gold stocks, Franco Nevada utilizes the streaming and royalty business model. Thus, it’s very similar to Wheaton Precious Metals. The key difference, though, between streaming and royalties is that the latter’s payoff represents a share of revenue rather than production (i.e. the metal itself). For those who want exposure to gold prices but without the drama of riding out the fortunes of a direct mining company, FNV stock offers many advantages.
Primarily, Franco Nevada is a free cash flow business. According to their website, FNV is “generally free of any cash calls to fund operating, capital or closure costs.” Additionally, they “participate at the revenue line of operations and are not directly impacted by cost inflation.” Thus, the company’s profitability margins can actually benefit from rising gold prices.
In many ways, FNV stock is a best-of-both-worlds investment. On one hand, you don’t have the risks associated with gambling on a single project that could go bust. But on the other, FNV has the juice to track the very positive narrative underlining all gold stocks.
Royal Gold (RGLD)
As I’ve mentioned above, many investors choose royalty and streaming companies because they offer a balanced approach relative to “pure” gold stocks. And as you can tell from the name, Royal Gold specializes in the royalty side of the business. But what makes RGLD stock different from its rivals?
First and foremost, diversification is critical in this sector. Even with royalty and streaming companies, they’re not guaranteed to be successful. Thus, from a protect-your-asset perspective, RGLD stock provides tremendous value.
Specific to Royal Gold, however, the organization has made a concerted effort to focus its portfolio on our side of the globe. According to their website, as of fiscal year 2018, 86% of Royal’s “net gold equivalent ounces of production were located in the host countries of Canada, Mexico, the Dominican Republic, Chile and the United States.”
If you’ve been following gold stocks for a while, you know the value of geopolitical stability.
Also, RGLD stock hasn’t enjoyed the technical performance of its two rivals above. As well, it’s comparatively undervalued, making Royal Gold an interesting opportunity.
If you intend to heavily invest in gold stocks, it behooves you to include financially stable companies in your portfolio. With B2Gold, you’re getting a low-cost international senior gold producer, with projects across several parts of the world, including Philippines, Namibia, Mali, and Colombia. But what attracts many buyers to BTG stock is the underlying robust financials.
B2Gold has a better-than-industry-average equity-to-asset ratio, along with favorable debt-to-equity and debt-to-EBITDA ratios. Additionally, the company has very high operating and net margins compared to the mining competition. Not surprisingly, BTG stock has exploded higher off its March lows.
To be fair, B2Gold has entered a sideways consolidation pattern since late April/early May. With positive economic reports shifting investors to the equities market, gold stocks lost some of their luster. However, concerns about social unrest along with escalating coronavirus hot spots should give BTG stock some positive momentum.
Kirkland Lake Gold (KL)
Although I’ve spent much time discussing the benefits of royalty and streaming companies, if you’re looking for a direct play in gold stocks, Kirkland Lake Gold should be among your top candidates.
Mainly, I love the geographic stability that KL stock offers. Unlike other mining operations, Kirkland Lake only operates in two countries – Canada and Australia. Besides the fact that both are English-speaking countries, we share similar cultures and ethos. When so much about gold stocks is incredibly volatile, it’s great to have at least a constant.
Just as importantly, Kirkland, like B2Gold, is a financially stable organization. Kirkland features very low debt-to-equity and debt-to-EBITDA ratios. As well, its equity-to-asset ratio is notably higher than most of its rivals. Finally, KL stock is a bit of a value play, with shares trading at around 13.3-times forward earnings.
Kinross Gold (KGC)
Thanks to the incredible resurgence of gold stocks, several mining companies have seen their fortunes turn for the better. However, the bullishness has left many precious-metals-based investments overvalued relative to historical and anticipated earnings. But if you’re looking for a value play, you’re not going to find too many that are better than Kinross Gold.
Currently, KGC stock trades at a multiple of 11.2-times earnings. Moreover, its forward price-earnings ratio is 12.5, making it a solid idea for those entering late in the game. Also, Kinross has other fundamental strengths, including strong operating and net margins.
Technically, KGC stock has held up very well, quickly rebounding from its March lows. Moving forward, I believe the broader narrative that supports all gold stocks – namely, concerns about social breakdown and economic instability – should lift Kinross.
Eldorado Gold (EGO)
Eldorado Gold is a company that’s been all over the map this year. In late February, EGO stock jumped briefly into double-digit-price territory. However, fears about the coronavirus pandemic quickly cratered its market value. Shares now find themselves again knocking on the psychologically significant double-digit threshold.
From a value investor’s perspective, there’s a lot to like about EGO stock. First, it has a PE ratio of 14.5, while it only trades slightly above 11-times forward earnings. Relative to other value plays in the precious metals sector, Eldorado is one of the highest ranked. In addition, the company features solid profitability margins and three-year revenue and EBITDA growth rates higher than most miners.
However, Eldorado doesn’t have the greatest fiscal stability in the metals market. Conspicuously, its Altman Z-Score ranks the company as distressed. Nevertheless, EGO stock could still swing higher based on the rising tide lifts all boats theory.
Caledonia Mining (CMCL)
Suddenly, Caledonia Mining has found itself as one of the most undervalued gold stocks in the market today. However, it didn’t get there through desirable means. Instead, CMCL stock careened toward the earth on the June 22 session. However, shares did claw back most of the losses in the following day’s trade.
Nevertheless, a lot of folks are jittery about Caledonia Mining for good reason. Even more alarming was the apparent lack of substantive news to justify the selloff. Yes, management applied for a voluntary delisting from the Toronto Stock Exchange. However, that’s old news.
Whatever the reason, only the most risk-tolerant trader should consider CMCL stock. Although it’s an intriguing company, Caledonia’s primary asset is the Blanket Mine located in Zimbabwe. Of course, Zimbabwe is famous for being home to the world’s largest population of “trillionaires.”
Put another way, Zimbabwe doesn’t exactly provide the most stable platform. Don’t get me wrong – you can make bank on CMCL stock, but you can also lose it too.
Sandstorm Gold (SAND)
With my last two ideas for gold stocks to buy, I’m going to focus on speculative bets. First up, we have Sandstorm Gold. SAND stock is an enticing investment because it combines multiple catalysts: relevant exposure to precious metals, dramatic upside potential, and the relative predictability of a streaming/royalty business model.
Basically, several analysts view SAND stock as the next Franco Nevada. That alone is enough to get you thinking. After all, FNV trades hands at $136 at time of writing. If Sandstorm got to that level, you’d have more than a ten-bagger in your portfolio.
So, what’s the downside? Aside from the bullish narrative going completely belly up, Sandstorm is incredibly overvalued. PE ratios, both from a trailing and forward perspective, are through the roof. However, because of its potential, it may be worth a shot with “dumb” money.
Sibanye Stillwater (SBSW)
In my opinion, I don’t consider Sibanye Stillwater to be overly speculative. That’s because SBSW stock isn’t just levered to gold. Rather, Sibanye has exposure to the platinum group metals. According to the company’s website, SBSW is the world’s largest primary producer of platinum. It also comes in second place for palladium production.
Both platinum and palladium represent core components within the electronics industry supply chain. Also, Japan Bullion Market Association chief director Bruce (Yuichi) Ikemizu makes an interesting argument about the supposed disruption of electric vehicles. Though touted as the replacement to combustion-engine vehicles, the traditional platform has been perfected for over a century. On the other hand, EVs are relatively fresh.
Moving forward, demand for combustion-engine cars may still be robust, necessitating products like catalytic converters. If so, that bodes very well for palladium, which in turn could boost SBSW stock.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he is long the precious metals mentioned in this article.