No Bubble Here: Gold Stocks Are Cheap - Investment Ideas
06 Abril 2011 - 9:00PM
Zacks
Everywhere you look, the headlines are saying that gold is a
bubble.
The yellow metal hit new record highs this week and
has risen every year for the past 10 years.
Yet if you look closer at the numbers, especially
during the recent rally, the "bubble" thesis looks a bit more
suspect.
What Bubble? Stocks Beating Up on Gold
Over the last month, gold is up just 2.1%. Does
that sound like a raging bubble to you?
Looking further out, over the last 6 months, the
performance of stocks has crushed that of gold.
Using the Gold ETF, SPDR Gold Trust (GLD), as a
comparison as it tracks the physical metal, the GLD was up 7.9% in
the prior 6 months while the S&P 500 returned nearly double
that, at 14.6%.
How Hot Are the Gold Mining Stocks?
Another indicator of a possible bubble market would
be investors pouring into the gold mining stocks and pushing
valuations of those stocks higher than the norm.
This is what we saw in the technology bubble as
tech stocks traded with sky-high valuations as investors "didn't
care" what the earnings (if any) were. Technology stocks traded as
high as 50x earnings before busting and coming back down to
earth.
Yet if you look at many of the gold companies, they
are trading with attractive valuations that don't indicate a
"bubble" at all.
P/Es Indicate "Value"
In fact, a quick screen reveals many of the large
gold miners trading at, dare I say it, "cheap" valuations with P/Es
below 15. Even as an industry, the gold miners are trading with a
forward P/E of only 16.8.
What gives? How can there be a bubble yet some of
the gold miners are value stocks?
That's because there is NO bubble. But the
combination of rising gold prices and cheap mining stocks certainly
creates an investing opportunity.
3 Cheap Gold Mining Stocks
You don't have to overpay to invest in the gold
miners. These 3 companies are all trading with P/Es under 15 and
have rising earnings estimates.
1. Gammon Gold
2. Anglogold Ashanti
3. Barrick Gold
1. Gammon Gold Inc. (GRS) is a
Canadian-based miner exploring in Mexico. At just a 1.4 billion
market cap, it is the smallest of the 3 gold miners listed here. It
has been expanding through acquisition as it recently acquired
Capital Gold for $420 million in cash and stock. Capital Gold also
mines in Mexico.
Shares have been hot, spiking 41% in the last 6
months, well ahead of the GLD's return over that period. Still,
with a forward P/E of just 11 and a price-to-book ratio of 2.1,
Gammon Gold is squarely within the value territory.
Earnings estimates are also rising, with the Zacks
Consensus up 20 cents to 89 cents in the last 3 months. Gammon is a
Zacks #3 Rank (hold) stock.
2. Anglogold Ashanti Ltd. (AU) is a South
African metals giant with exploration around the world. This Zacks
#1 Rank (strong buy) is expected to grow earnings by 82% in 2011.
2011 Zacks Consensus Estimates have risen to $3.87 from $3.51 in
the prior 3 months. Anglogold unwound its hedges in 2010 so it is
now completely unhedged to gold prices.
Shares are trading at just 13x forward estimates
and shareholders also are rewarded with a dividend yielding
0.5%.
Over the last 6 months, shares have under performed
compared to the GLD, returning just 3.7%.
3. Barrick Gold Corp. (ABX) is a large
Canadian miner with operations at 25 mines around the world. The
2011 Zacks Consensus Estimate has jumped to $4.25 from $3.88 in the
last 90 days. That is earnings growth of 28% over 2010.
The valuations are attractive with a forward P/E of
just 12.7x. This Zacks #3 Rank (hold) also has a price-to-book
ratio of 2.6, which is considered "value" as it's under 3.0.
Shares have returned 10.5% over the past 6 months,
just outpacing the GLD over the same period. It also pays a higher
dividend than the industry, with a yield of 1.0%. The industry
averages 0.8%.
[The author of this article owns shares of the SPDR
Gold Trust (GLD).]
Tracey Ryniec is the Value Stock Strategist for
Zacks.com. She is also the Editor in charge of the market-beating
Zacks Value Trader service. You can follow her at
twitter.com/traceyryniec.
BARRICK GOLD CP (ABX): Free Stock Analysis Report
ANGLOGOLD LTD (AU): Free Stock Analysis Report
GAMMON GOLD INC (GRS): Free Stock Analysis Report
Zacks Investment Research
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