Silver companies are severely punished this year. This is not a surprise. Silver is down more than 22% year-to-date. The silver ETF (NYSEARCA:SLV) has suffered an even bigger decline. It trades more than 25% lower than at the start of the year. Companies that produce silver have seen an even bigger decline in the price of their shares.
If you are bullish on silver, you would be interested in the ways to play it. The easiest and the most direct one is to by SLV. However, most punished stocks often produce better results should the rebound happen. That's why I would like to point your attention to three silver stocks that have been sold heavily this year. Silver Standard Resources (NASDAQ:SSRI) is down more than 51% year-to-date. Silvercorp Metals (SVM) lost 47%. Hecla Mining (NYSE:HL) suffered a 44% decline. These numbers look huge and scary. Nevertheless, such a drop could present a buying opportunity.
When I see stocks punished like that, I first look at their earnings. Do these companies lose money at a constant basis? No, they do not. The last quarterly reports for SSRI, SVM and HL were positive (earnings data and estimates sourced from Yahoo! Finance). The stock market looks into the future. Expected results influence share prices more than past results. So, are these companies expected to lose money in the future?
Let us look at the earnings estimates for these miners. SSRI is expected to make $0.22 per share this year. SVM is anticipated to report $0.25 per share. Hl is expected to deliver a $0.33 per share result. You can see that all three companies a expected to stay in the money-making zone for 2013. However, it is important to point out that analyst estimates are subject to change. If we compare present earnings estimates for 2013 with estimates that were made three months ago, we would notice a downward revision of 20.5%. Declining silver prices surely contributed to this revision. If you believe that silver prices would not be declining further, you can expect all three companies to make money in 2013.
All three stocks have attractive forward P/E ratios: 16.66 for SSRI, 5.63 for SVM and 6.52 for HL. It looks good if you believe in the earnings estimates. The forward estimates imply the rise of the silver price.
Two companies have recently made moves to strengthen their cash position. Hecla Mining issued $500 mln of 6.875% notes due in 2021. Silver Standard Resources released $250 mln convertible senior notes due in 2033. I see the ability to access long-term credit as a positive sign for both companies.
Should you add these stocks to your portfolio? First of all, it depends whether you believe silver prices would rise or not. All three stocks are clearly punished because of the drop in silver. I think it is very unlikely that they would rebound if silver prices stay on their current levels. Recent days saw the development of panic in most commodity-related instruments. It is hard to predict prices when there is a panic, because panic is irrational. In such conditions, some players would face forced sale of their positions because of margin requirements. This adds to uncertainty about the short-term fate of these stocks.
I'd recommend investors consider buying these stocks when the dust settles. The prices must stop falling and find support at some level. It could be $5.70-$6.50 for SSRI, $1.90-$2.50 for SVM and $2.30-$3.00 for HL. These are conservative estimates. The above-mentioned stocks could easily settle higher than those levels. The common mistake that a lot of investors make is to rush into the chosen stocks. They are afraid that the prices will go higher and they would miss the move. I think that it is better to be patient and wait for comfortable prices. I would like to add that if you are bullish on silver, you should add the silver ETF to your portfolio. Sometimes market reaction is strange. If silver prices go higher, you would be sure that SLV goes higher too.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SLV, HL, SSRI, SVM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.