It often pays to buy stocks when nobody seems interested, and sell when everyone seems to think that the sky is the limit. That is hard to do, because you need to go against the grain and think independently. When everyone seemed to love gold stocks, it was time to sell, but a major reversal has caused many gold mining stocks to drop to new 52-week lows. This could be the best buying opportunity in years for many gold stocks. While the price of gold is off the highs, it still remains at levels that is solidly profitable for many producers.
The stock market and gold has dropped a bit in recent days and that has put even more pressure on stocks like Barrick Gold (ABX). This stock recently hit a new 52-week low and it is now oversold with a relative strength index of about 32. It also looks deeply undervalued when considering a number of metrics.
First of all, analysts expect Barrick to earn about $4.40 per share in 2013, and around $4.80 in 2014. This puts the price-to-earnings ratio at below 7, and that is about half the average P/E ratio for the S&P 500 Index (SPY). It also trades way below $50.02, which is the 52-week high and it offers a solid dividend yield of 2.5%. This leads me to believe that the markets have "overdone" the selloff in Barrick shares and that could mean the stock is due for a sharp rebound as soon as cooler heads prevail. Investors often push stocks too high when momentum gets carried away to the upside, but the same often happens with downside momentum, when investors push stocks down to ridiculous levels. I think Barrick shares are at or near that point now. That means it could make sense to start buying the stock in stages, and build a position for what could be a strong rebound from oversold conditions.
While gold has been down lately, many positive fundamentals remain for this precious metal and that bodes well for Barrick and a potential stock rebound. Investors remain in a low interest rate world where central banks around the world are engaging in easy money policies in a race to devalue currencies in order to boost economic activity. This trend is not likely to end anytime soon, and gold is a physical hard asset that cannot be printed like a paper currency. Gold is also likely to remain in demand as emerging market countries like China and India become more prosperous.
Barrick Gold shares appear to have limited downside risk at current levels and the company also has a lower risk profile because it operates many of its projects in politically stable regions such as North America, South America, and Australia.
Key Data Points For Barrick Gold From Yahoo Finance:
Current Share Price: $30.39
52-Week Range: $30.20 to $50.02
Dividend: 80 cents per share which yields 2.5%
2013 Earnings Estimate: $4.40 per share
2014 Earnings Estimate: $4.80 per share
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ABX over the next 72 hours.