Gold has tumbled recently from a top of just over $1,900 an ounce. The gold mining stocks have been punished as the price of bullion has fallen. The sell-off has been overdone. One stock that is undervalued here is AngloGold Ashanti (AU).
AngloGold Ashanti – “AngloGold Ashanti Limited primarily engages in the exploration and production of gold. It also produces silver, uranium oxide and sulfuric acid. The company conducts gold mining operations in South Africa; continental Africa, including Ghana, Guinea, Mali, Namibia and Tanzania; Australia, and the Americas, which include Argentina, Brazil and the United States. It also has mining or exploration operations in the Democratic Republic of the Congo, Guinea and Colombia. As of December 31, 2010, the company had proved and probable gold reserves of 71.2 million ounces." (Business Description from Yahoo Finance)
Seven reasons AU is a buy at $40 a share:
1. The stock is trading right at a long term technical support (See Chart)
2. AU is selling near the bottom of its five-year valuation range based on P/E, P/B and P/CF.
3. AU has grown earnings at 33% a year on average over the past five years. It earned $2.12 a share in 2010, is projected to earn $3.78 in 2011 and $5.71 in 2012.
4. It has crushed earnings each of its last four quarters. The average beat over consensus over the past four earnings report has been 75%.
5. AU is one of the core holdings of John Paulson. Part of its sell-off is probably attributable to being sold off to meet redemptions. This headwind should cease at the end of October or soon thereafter as redemption requests are due by end of month.
6. The five year projected PEG is a rock bottom .17 and consensus estimates for 2012’s EPS has dramatically been raised in the last sixty days.
7. The stock price is significantly under analysts’ price targets. The median analysts’ target is $66 on AU and HSBC is at $75.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AU over the next 72 hours.