As the fiscal cliff looms and the stock market corrects, opportunity abounds. The commodity sector has been hit especially hard over the past two weeks. As my biography indicates, I'm presently holding only two stocks. As I saw Endeavour Silver (EXK) dip into the $7 range over the past week, I aggressively seized the moment and grabbed it with both hands. I expect it to be the quintessential buy-and-hold equity. While it likely will be filled with severe price gyrations, including volatile weeks and months, I anticipate that over the course of years it will emerge as the best stock to own in the commodity sector.
The standard belief is that a portfolio should include 5% gold (GLD), (PHYS) or precious metals. I suggest a higher percentage. The price of gold and silver (SLV), (PSLV) hasn't gone up steadily for more than the last 10 years by accident. Gold is not in a bubble. Along with silver it will continue to rise over the long haul. For clarification, I am not a "gold bug." I don't own guns and I am not stocking up on canned goods in my garage. I do, however, feel that the ping-pong game of purposeful, global currency devaluation is not just going to continue but will accelerate. Unfortunately, the belief exists that there are no effective alternatives. James Rickards' Currency Wars is a great book for those who want to read more on this troubling topic.
I am not high on industrial commodities. Steel, iron ore, copper, etc. (XLB) will continue to suffer in the prolonged global recession. Furthermore, I wrestle in my mind over the general concept of gold because, similar to a painting by Picasso, its worth is solely up to the discretion of its buyers.
Silver is the perfect commodity. Like gold, it is a monetary metal that will increase in value during inflationary times. Unlike gold, it has functionality. Its unique properties will be in high demand when world economies finally begin to expand and reach sustainable growth periods. There's nothing better than a win-win situation, right?
It's important be cognizant of the inherent risks that come with investing in a miner over gold and silver bullion. The headaches can be in abundance from the ridiculously frustrating operational cost fluctuations to the basic reality that the earth can sometimes move. I believe, however, that the value between the metal in the ground vs. that above is at too great a generational disparity to ignore.
So why will Endeavour Silver be the eventual king of the commodity stocks?
For starters, it offers three reliable silver and gold mines for its $800 million market cap in the politically friendly districts of Mexico. Shareholders also receive legitimate prospects for future expansion in a sector that will flourish for the next decade and beyond. Plus, and perhaps most important, it has great management. When a person purchases equity in a company, they should never lose sight of the fact that they are buying its management.
Chief Executive Officer Brad Cooke strikes me as a bright man with a keen eye on the growth of his company. He has methodically put together the trio of silver mines while keeping its operational costs low. The healthy gold by-product of each mine is of great assistance. In their most recent quarter, it cost the company a bit under $5 to extract each ounce of silver that it produced. With silver currently selling at over $30 per ounce, the margins are solid and will continue to ascend.
I'm never all that impressed with a CEO who loves to dazzle investors with dividends and share buyback programs that they sometimes can't even afford. I prefer the philosophy of Cooke, who has been putting money back into the company in a strategic fashion. This maximizes share holder value. And while other miners may have cheaper valuations, Endeavour will grow into what has recently become a less lofty multiple.
This past April, Endeavour Silver wrestled away the El Cubo mine from Aurico Gold (AUQ) for just over $200 million in cash and stock. While the acquisition was not extraordinarily cheap, I concur with Cooke's general philosophy of paying a bit more for a good property than acquiring something subpar at a bargain. He recognized that this third mine helps solidify the future growth plan for the company. El Cubo is a silver and gold mine that was underperforming, poorly run, and underappreciated by its former owners. Investors should feel encouraged that Endeavour and their capable team can now begin enhancing the property into a thriving, revenue-generating, reliable mine for many years to come. Endeavours' track record includes similar turnaround success stories at their other two major mines (Bolanitos and Guanacevi). This bodes well for a likely hat trick.
It was around the time of the El Cubo acquisition in late April of this year that Endeavour Silver's stock price began to severely underperform its peers. Other silver miners -- PAAS, CDE, AG and HL -- have seen significantly better six month returns. A similar outperformance can be found on the chart of the exchange-traded fund GDX, which consists of large-cap miners -- GG, ABX, AEM, NEM, SLW, etc. This blatant underperformance of EXK was clearly due to what I'm labeling "dilution 2x." As part of the El Cubo transaction, Endeavour paid Aurico 11 million of its company shares. Aurico then immediately turned around and flushed the 11 million shares back into the market at a loss. Aurico must have been clearly hankering for some cash. This was before Aurico sold its Ocampo mine for $750 million in early October. This sequence of events, resulting in a suppressed EXK stock price, has presented long-term investors with a wonderful opportunity. I couldn't resist the $7 price handle over the past few days and decided to pounce.
So, I have quite the portfolio, right? Money market funds and two recently purchased stocks, Pandora (P) and Endeavour Silver. No bonds, mutual funds or ETFs. Not even a single dividend to rely on. I've heard it told over and over that "one must be diversified," or "a person is crazy if not diversified." I see the point but choose a different path. While I completely understand how mutual funds and ETFs make a lot of sense for many people, they are not for me. Even in the mining sector, where I'm convinced great opportunity is abundant, I can't bring myself to buy the corresponding ETFs (GDXJ) knowing that they include holdings of lousy companies (even if it's small percentages). For that luxury I get to pay fees? No thank you. I prefer doing my homework and buying the best. I've researched commodity stocks feverishly for years and, as in all sectors, there are a lot more bad ones than good ones. So instead of watering down my portfolio with lesser names, I'd rather put more money into the one that is going to be the champ and hang on for the long haul. I've made my selection. My pick is Endeavour Silver.
Disclosure: I am long EXK.