Goldcorp: A Shining Star in a Dismal Market

How many shareholders can say their stock has actually risen in the carnage of the last four weeks? It's probably safe to say, you could probably count them on one hand. Owning shares in Goldcorp (GG) is the exception. Its performance has been nothing less than stunning, as its shares have rallied 72% from their 10/27 lows of $13.84 to close at $24.22. Thanks to a 6.6% spike in gold on Friday to $801, and a strong showing in the S&P, GG rocketed up 27%, as its stock tacked on a whopping $5.19 from its previous close of $19.03

Analyst expectations are just too low: a good portion of analyst expectations are modeled utilizing gold prices ranging from $650-$750. The analysts are far too conservative, as their forecasting does not seem to take into consideration the possibility of further appreciation in gold prices. Now that gold has broken the $800 resistance area, the chances of a momentum gain, and a subsequent run to the $1200 area is certainly not out of the question.

GG's current 2009 analyst earnings estimates are probably too low at 67 cents, and need to be raised in direct correlation to the price of gold. For every $50 rise in gold, GG's earnings should increase 20%, meaning if gold rallies back to $1000, the company's earnings should increase by 80% to $1.20. Gold is a safe haven in this current horrific economic climate, and the demand for it will steadily outstrip its supply over the coming years. Investors who hold it, either through physical possession or by indirect ownership via gold mining companies, should be rewarded generously.

Short interest: Although GG's short interest dropped nearly 26% from 9.73 million shares to 7.18 million shares, Friday's rally was partially compounded by shorts scurrying to cover their positions to avoid the prospect of a nasty short squeeze. This additional buying, certainly had a hand in Friday's monster rally, and should provide nice fuel for further rallies down the road.

Price target: Most analysts have placed GG with a one year $32 price target. This could be too low, especially considering just last July, the shares were north of the $50 mark. The possibility the shares will rally back to the $40 area seems more plausible, as a couple more days like GG experienced on Friday would effectively launch the shares to that point.

Sector peers: GG wasn't the only gold mining company to put on a star performance Friday, as AU took the top prize with a 43% gain (it also reported it obtained a new $1 billion credit facility) while Gold Fields (GFI) shares rose 37%, Barrick Gold Corp (ABX) added 31% and Newmont Mining (NEM) jumped 25%.

It's interesting to note that out of the five mining companies listed within this piece, only NEM is a US based corporation and carries the lowest forward multiple of the sector at only 12 times 2008 earnings estimates of $2.25. US corporations clearly provide investors with much better transparency, as they are required to file reports with the SEC ( foreign companies are not) enabling potential investors the ability to access important information such as 10Ks and insider trading activity. AngloGold Ashanti (AU) and GFI are South African based, while GG and ABX both originate in Canada.

Bottom line: The trend is your friend, and GG's relative strength has been impressive. It would be advisable to jump on this momentum train to capture some potentially handsome profits, as the stock attempts to rally back to the $40 mark.

Long: GG

Comments

[GMiki1:]

GG has great resources and not much debt in comparison with some of the other producers. I'm long GG.

2008 Nov 25 07:33 PM

[Kayboe:]

GG has mantained much of its stock value over this year -while most other precious metal miners have not. I like the lower debt of GG mentioned by GMiki. -I'm buying on dips.

2008 Nov 26 07:48 PM