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Summary

  • Silver and gold are trading at multi-year lows along with Silver Wheaton’s stock.
  • Even so, Silver Wheaton is well positioned for the future.
  • The market appears to be shifting into risk off mode in recent weeks.
  • You have to buy low to sell high.

Silver Wheaton (NYSE:SLW) reports earnings after the bell on Thursday the 8th. Silver Wheaton's stock is down nearly 20% in just the last month or so and currently trading at five-year lows. The company's profit margins were hit hard by the swift drop in the price of silver throughout 2013. The stock has suffered greatly due to these developments. Nevertheless, you have to buy low to sell high. Moreover, the stock is trading at historic lows just as the company's future outlook appears to be improving. This leads me to believe the stock is currently a great buying opportunity or a diamond in the rough as it were.

(click to enlarge)

(Chart provided by Finviz.com)

Company management has well positioned Silver Wheaton for the future

Silver Wheaton has become the largest precious metal streaming company in the world in 10 short years. The company has a number of agreements where, in exchange for an upfront payment, the company has the right to purchase all or a portion of the silver and/or gold production, at a low fixed cost, from high-quality mines located in politically stable regions around the globe.

(Graphic provided by SilverWheaton.com)

Other than the company's initial upfront payment, Silver Wheaton typically has no ongoing capital or exploration costs. The company does not hedge its silver or gold production. On the other hand, it's times like now when the value of silver is low that Silver Wheaton actually can make some pretty good streaming arrangements with miners. Miners come to Silver Wheaton for financing in times of distress when other less expensive funding alternatives are unavailable. This gives the company a distinct negotiating advantage. The company is well positioned going forward with significant production growth through 2018.

The stock is fundamentally solid

Currently, Silver Wheaton is trading for a PEG ratio of approximately 1. The PEG ratio is a broadly-used indicator of a stock's prospective worth.

(Table provided by Yahoo.com)

It is preferred by numerous analysts over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is undervalued. Many financiers use 1 as the cut-off point for PEG ratios. A PEG of 1 or less is believed to be favorable. As Warren Buffett would say, "Price is what you pay, value is what you get."

Furthermore, Silver Wheaton pays a dividend and guided for exceptional production growth going forward. The company holds a portfolio of world-class assets including stakes in two of the top five silver deposits worldwide.

(Graphic provided by SilverWheaton.com)

Moreover, the company is 100% unhedged, providing pure upside to increases in the price of silver and gold. Being a streaming company rather than a miner also has its fundamental advantages. The two major ones are low fixed operating costs and no ongoing exploration costs. I submit as Silver Wheaton improves the bottom line going forward by increasing production and streamlining costs the stock will appreciate significantly from current levels, not to mention what will happen if the price of silver rises substantially over the next year.

You have to buy low to sell high

You hear this all the time. The problem is usually when a stock is trading at its lows there are many grave concerns associated with the company. Take Silver Wheaton right now for instance. Silver is currently trading at multi-year lows crimping the company's streaming margins. Silver has fallen 30% since March 2013 from $28 to $20. Nonetheless, I believe last year was a so-called "risk on" year with market participants leaving safe haven investments such as gold and silver for high flying momentum stocks. This year, a reversal of fortune is occurring. High flying momentum stocks are currently getting crushed one after another. Some pundits would have you believe that the selling will remain confined to this segment of the market.

(click to enlarge)

(Chart provided by CNBC.com)

Nonetheless, after witnessing similar market behavior many times previously, I suggest indiscriminate selling is not far behind. I posit we have not heard the last bad news out of Ukraine or China yet either.

Downside Risk

The company can still make a profit with silver as low as $15 per ounce. If the global recovery fades and geopolitical risk subsides, the price of silver could drop even further. This would not be good news for the Silver Wheaton.

Conclusion

The US economy has had a weak start due to weather related issues, yet seems to be snapping back as of late. If the US economy continues its upward trend along with the rest of the world, the industrial demand for silver should improve. Moreover, I am not so sure Putin will be satisfied for long with only annexing Crimea. I predict he has much bigger plans for Russian expansion. This may cause a pop in the spot price of silver as market participants flock to the precious metal as a safe haven play.

Final Thought

The current geopolitical risks and macro-economic developments combined with the fact Silver Wheaton is trading at historical lows leads me to believe the stock is currently a diamond in the rough. If you plan on starting a position in the stock, I would layer into any position. I surmise guidance will be the key factor regarding the stock's performance after earnings are announced.

Source: Silver Wheaton: A Diamond In The Rough