I remember when silver was undesirable as an investment and sold for less than $5 an ounce. I also remember when Bank of America (BAC) sold for about $50 per share. At that time, it was a good opportunity to buy silver and sell Bank of America. Fast forward to 2011, and silver is nearly $50 per ounce and Bank of America is about $12 and is considered to be an undesirable investment by many. There is definitely no frenzy or rush to buy BAC shares and there is no bubble in this bank stock. The same can't be said about silver and yesterday we saw a large move down in the price of silver as margin requirements, which you can read more about here. When you see a large drop due to raised margin requirements, it is a sign of froth and speculation. It also is a reminder that leverage is high in the silver market and the use of excess leverage can result in a quick collapse in prices. We have seen excess leverage bring down the stock market, and companies like Lehman Brothers, as well as real estate. There are multiple signs pointing to a bubble in silver now, which you can read about here.
Due to the extreme overvaluation in silver and the undervaluation of Bank of America, I think it is time to rotate out of silver bullion and silver stocks (at least some for now) and buy stocks like Bank of America. While silver and silver stocks can go higher in the short term, and BAC shares could go lower, I strongly believe that in the long run, silver will underperform and Bank of America will see solid gains. Many investors like silver as a way to guard against inflation and the falling dollar but ultimately Bank of America is a beneficiary of inflation in the long run as well. So far, the inflation created by low rates has not boosted the housing market but in time I believe it will. As the cost of everything rises, real estate will eventually do the same. Real estate typically has been a great inflation hedge, and when home prices start rising even a little, it could mean greatly reduced foreclosures for Bank of America. Also in the future, interest rates are likely to rise, and when that happens, precious metals could see big price drops. Most investors will not be as willing to hold a large position in silver when they could be earning 5% or much more when rates are back to reasonable levels. Remember, it often pays to be contrarian and not move with the herd. Here is a review of the silver stocks I believe should be sold, along with data on why Bank of America stock looks like a great opportunity now.
Bank of America shares are trading at $12.34. The 50 day moving average is about $13.52 and the 200 day moving average is about $13.22, so these shares are trading below support levels now. Earnings estimates are about $1.33 for 2011 and $1.87 for 2012. This gives BAC shares a PE ratio of only about 10 times earnings for this year and even less for 2012. The dividend is 4 cents per share per year, which is a yield of about .3%. In time, BAC shares offer rebound potential, a dividend that is likely to grow, and a low PE ratio. These shares are trading below book value and although earnings continue to be impacted by mortgage defaults, it is only a matter of time before this bank returns to much higher profitability levels. In my opinion, it's only a matter of time before this bank is earning at least $2.50 per share, and I am willing to wait for this. I do see the potential for continued weakness in this stock so it makes sense to accumulate in stages.
Here are the silver stocks that have run up with the price of silver. While I think silver bullion is in a bubble and should be sold, these stocks also appear to have downside. Notice that these stocks are not trading well considering the recent record high price for silver. To me, that means the market does not believe the price of silver is sustainable at current levels.
Silver Wheaton Corp., (SLW) is trading at $37.77. SLW is a silver and precious metals company based in Canada. These shares have a 52 week range of $17 and $47.60. The 50 day moving average is $42.31 and the 200 day moving average is $32.48. Earnings estimates for SLW are for a profit of $2.08 per share in 2011, and profits of $2.23 per share in 2012. With these shares trading at nearly 18 times earnings, I would be selling.
Silvercorp Metals, Inc., (SVM) is trading at $12.30. SVM is a silver and precious metals company based in Canada. These shares have a 52 week range of $5.86 and $16.32. The 50 day moving average is $13.95 and the 200 day moving average is $10.81. Earnings estimates for SVM are for a profit of 42 cents per share in 2011, and profits of 62 cents per share in 2012. With these shares trading around 25 times earnings, I would be a seller.
Endeavour Silver Corp., (EXK) is trading at $10.61. EXK is a silver and precious metals company based in Canada. These shares have a 52 week range of $3.07 and $12.75. The 50 day moving average is $9.85 and the 200 day moving average is $6.36. Earnings estimates for EXK are for a profit of 69 cents per share in 2011. With these shares trading at nearly 17 times earnings, and trading at nearly triple the price of the 52 week lows, I would be selling these shares.
First Majestic Silver Corp., (AG) is trading at $18.71. AG is a silver and precious metals company based in Canada. These shares have a 52 week range of $3.24 and $26.88. The 50 day moving average is $19.53 and the 200 day moving average is $11.52. Earnings estimates for AG are unavailable on Yahoo Finance. These shares are trading at very high PE ratios and well above the 52 week low of $3.24. According to Yahoo Finance, this company only earned about 39 cents per share and has an enterprise value of over $2 billion and revenues of only about $12.7 million. You can see that data here.
iShares Silver Trust (SLV) is trading at $42.83. SLV is a silver exchange traded fund that tracks the price of silver. These shares have a 52 week range of $16.73 and $48.35. The 50 day moving average is $37.59 and the 200 day moving average is $27.35. With this investment trading at close to triple the price of the 52 week lows, I would be selling these shares.
If you still don't think silver is in a bubble just take a look at these two articles put out just in the past week stating the positives of investing in silver/precious metals:
- May 2: Why Precious Metal Miners Currently Offer the Best Values in the Market -- This article takes some of the highest PE ratio stocks and compares them to precious metals stocks in order to make them look like relative values. How about using Hewlett Packard (HPQ) which is trading at about 8 times earnings to the metals stocks instead of Salesforce (CRM) which has a sky high PE ratio?
- April 27: No Sign of the Top in Silver -- I find it interesting that anyone who posted a negative comment towards silver received far more negative ratings than those who posted positively about silver. Also, just the title is a potential warning sign. I remember when people were saying there was no sign of a top in housing prices ... until there was.
The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.
Disclosure: I am long BAC.