Today, investors are hard pressed to find assets that offer attractive valuations and growth prospects. From industrial stalwarts Caterpillar (CAT) and Deere (DE) to leading innovators in consumer technology such as OpenTable (OPEN) and Priceline (PCLN), growth doesn't come cheap.
As markets drink round after round of liquidity, assets that are truly scarce will continue to outperform those easily reproduced or replaced. A premonition of triple digit P/E multiples on mid- and even large cap companies could be extreme U.S. dollar devaulaution. Such an event would leave many businesses able to sustain extreme inflation valued more highly in dollars. Those businesses will generally produce commodities, highly regarded technology or brand name items that are less dependent on commodity or labor inputs than mass produced items. Low multiples on Johnson and Jonson (JNJ) and Procter Gamble (PG) may indicate a difficult road ahead.
Priceline is valued above 50X earnings alongside massive disturbances across multiple continents, OpenTable is sailing above 175X while consumers cut down on gas consumption and expensive outings, and SalesForce (CRM) is sniffing a 300X multiple, along with a glut of competition and dwindling margins. It's a wee bit surprising that Goldcorp (GG), the world's leading low-cost gold miner, failed to make new highs April 29th, the same day the Dow Jones made highs since early 2008 and gold rallied $30/oz to over $1565.
Just a month ago my analysis deduced that physical PMs, specifically silver, deserved immediate attention from investors. April saw the spot price of silver rise by 30% while leading producers and refiners, such as Silvermetals (SVM), Silver Standard Resources (SSRI) and Silver Wheaton (SLW) leveled off or fell in price. From juniors (GDXJ) to seniors (GDX), gold miners too have largely underfperformed the yellow metal in recent weeks and months.
Two additional key factors put mining stocks higher on my current buy list than the shiny stuff they dig up:
New Projects: With silver approaching $50/oz after spending recent years in the $10-20 range and gold making all-time-highs regularly, mining operations are expanding by the day as higher cost projects become profitable.
Margin for Error: The more extensive a company's operations, the less prone that company is to loss from a single mistake. Growing demand, new projects and wider margins heal all wounds.
While individual stocks, specifically small caps, may offer appealing valuations, playing a booming sector such as gold miners is a rare case in which additional costs of owning ETFs wouldn't stop me from holding them medium-term. Diversification is worth a premium, given the strength of the trend. The fund price can increase faster than net asset values (NAV) as investor demand intensifies. Still, leading large cap producers with trailing earnings multiples below twenty, such as Barrick Gold (ABX), Newmont Mining (NEM) and Kinross Gold (KGC) appear to be bargains.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GDX, GDXJ, KGC, ABX, GG over the next 72 hours.