Friday, June 27, 2008

July 2008 Stock Pick

This may seem like an inauspicious time to come up with a new pick. My first and as yet only pick is down more than 20% - so if you trust me, you should be buying even more of that one, and if you don't trust me, what's the point of giving you more advice? Well, I want to go on record with more picks. I believe that there is a very high chance of my first pick being much higher in 1-2 years, and I want everyone to be prepared with another good opportunity in case that first one soars soon (i.e. before you can buy it).

This is a difficult choice. The company I really wanted to recommend is a recommendation of The Motley Fool's Rule Breakers paid subscription service, to which I was given a free trial against my will (not that I'm not grateful). I would feel too guilty were I to give away on my free blog what they are selling to their subscribers, even though I came up with the idea independently of them. So I will go with my second choice, a company that I think is not as well-run, not as likely to continue growing for more than 4 years, and not as likely to return 1,000% or more over the very long term. Maybe next month I'll get over my scruples and give you company A. This month, you'll have to settle for company B. Or should I say, "company C"?

Meet Coeur d'Alene Mines (CDE). To look at the financial data, this is not a great-looking company. Return on equity is less than 3%, and return on assets is less than half of even that. Lame! The earnings growth -66%... why! That's not growth at all, Jasper! That's shrinkage! And for all those lame stats we're expected to pay how much times their past 12 months' earnings? 32?! "Are you kidding us, Uncle Fleabagger?"

You're missing the big picture, kids. Do you remember the company's name? Coeur d'Alene whats? Mines. Silver and gold mines, to be exact. Virtually all of their revenue comes from mining the shiny metals. "Why does that change everything?"

Hear now and profit for the rest of your life: mining companies are rarely good investments, and miners of the rarest metals are accordingly more rarely good investments. This is one of those times.

Why? Well, because your government sucks. Literally. If you live anywhere in the Americas, Europe, Africa, South Asia, East Asia, or almost anywhere else in the world, then you probably are ruled by a government that inflates its currency to pay for political favors in order to stay in power, essentially sucking the value right out of your money. I'm not going to debate the merits of this, but just pay attention to how much more a gallon of gasoline or a bag of rice costs in that currency of yours, and you'll know I'm telling the truth.

So what does this have to do with precious metal miners? Well, wherever possible, people acquire gold and silver when they're afraid that their paper money is going to become more and more worthless. People are already waking up to this in Vietnam and India, and fabulously rich people Jim Rogers and Peter Schiff have been going this route. As more and more Norteamericanos start to figure out that "core inflation" is a scam to make people complacent, there will be a lot more silver and gold buying in the U.S. Not to be outdone, China and its East Asian tigers (Singapore, S. Korea, etc), as well as Japan, are still using trace amounts of silver (and sometimes gold) in the manufacture of all kinds of products (microprocessors, cameras, drugs, etc). That's because they still make things in those countries.

Yes, everyone in America will be much poorer in a couple years unless they own silver or invent something spectacular. So who will actually make more money over the next few years? People who own a lot of silver that is vastly undervalued because of fears of the costs of accessing that silver exceeding the value of that silver because it's underground in the midst of a bunch of worthless rock. That is, silver mining companies. Well, Coeur d'Alene has 278.8M oz in silver reserves and its market cap is equivalent to 92M oz at today's silver prices (which I think are going to go up). Now, of course there are costs associated with getting that silver out of the mines and selling it. And Coeur is busy diluting their equity to raise the capital to cover those costs. Yeah, that kinda sucks. But if you think (as I do) that silver prices are going to go up faster than most other prices, miners with huge silver reserves (such as Coeur) will stand to profit enormously, returning a substantial gain to shareholders despite share dilution and rising mining costs. If silver prices rise (or even just stay where they are right now), the numbers that look bad now (their return on equity and return on assets, for example) will look a whole lot better.

One of the best things going for Coeur, according to my thesis, is that they do not hedge against silver prices, a process by which many miners sell their product in advance at fixed prices, limiting their potential profit if the price of the metal soars, and theoretically (but not really) limiting their risk. It's actually risky to hedge, because extraction prices could rise for the metal they've already sold at low fixed prices, forcing a company into bankruptcy because of their attempts to play it safe. Coeur doesn't do that. They are fully leveraged to the price of silver (and gold and everything else), just the way I like it.

Unfortunately, I am forced to publish after market hours, so something could happen to drastically change the price of CDE stock between when I publish this and when you are able to buy it. But it closed at $2.90 today, and it's a good way to play an increase in silver prices anywhere under $3.50, maybe more. Disclosure: I own shares of CDE and call options with various expirations. Consult your own financial advisor and/or astrologer. Whatever you do, own your decision, it's your own.

July 5 edits: I fixed the part about Coeur's ROE and ROA at the beginning and tied my thesis back to it in a later paragraph. I added some quotational marks. And I added a clause about how inflation "sucks." And by the way, CDE closed at $2.52 Thursday after making new 52-wk lows. It's amazing.


Debbie R. said...

I don't know if I care much for stock "C". Though your scruples won't allow you to divulge what stock "A" is at the present time, please do share your "B". ;-)

Debbie R. said...

I just got a reading off my crystal ball, though it's been foggy lately...Is Stock "A" HOG?

weblogbob83 said...

Wow. Even though "company 'C'" was my unfunny pun on Coeur d'Alene's first initial, and it really is my second favorite stock right now, you just guessed one of my top 10 contenders, as yet, for August's rec. Actually, counting June's rec, NDAQ, CDE is my 3rd favorite. After NDAQ, and the one my scruples won't allow me to divulge, which is not HOG.

As for CDE, I think the company is executing well right now, pulling a lot of silver out of the ground, acquiring properties, and not hedging their prices. (Did I remember to put in my original post that they're not hedging?) You have to believe that silver prices (and therefore inflation) are headed down over the next two years to think CDE's fair value, based on what we know now, is less than about $4.50 - $5.00 per share, depending on how dilutive they are (a legitimate concern, but easily overblown considering the other tailwinds they have). I just don't see inflation or silver staying as low as they are now, considering the political environment.

If you want a list of Motley Fool Rule Breakers recommendations, you could sign up for a free trial and look at all their recs for free. I am not an employee of The Motley Fool, and I am not sponsored by them.