AngloGold Ashanti (AU) is a company that engages in the exploration and production of gold. While it does mine other precious metals, like silver and uranium oxide, gold is its primary business. As of December 31, 2010, the company had probable gold reserve of over 71 million ounces. John Paulson owned over $1.68 billion in AU at the end of the second quarter. Many other famous fund managers, such as Jean-Marie Eveillard, John Thiessen, and Louis Bacon have bullish positions in AU as well.
AU recently traded at $42.67, near the lower end of its 52-week range ($38.97-$52.86). It is expected to earn $3.39 in 2011 and $5.63 in 2012. Analysts predict the stock will top $66.29 a share within the next 12 months. Its current P/E is 22.91.
We are going to take a closer look at AU and its comparable competitors, including Barrick Gold Corporation (ABX), Newmont Mining Corp. (NEM), Gold Fields Ltd. (GFI), and Goldcorp Inc. (GG), to determine which stocks promise higher returns for investors.
AU reported adjusted headline earnings of $342 million for the second quarter of 2011, up from $129 million the previous quarter and from $50 the same quarter last year. It also improved its return on capital employed, boosting the number from 15.3% last year to 17.5% this year and pushing its return on equity from 19.9% last year to 21.5% this year. AU will not report its third quarter earnings until November 4, 2011.
Zacks did not provide expected earnings growth for AU but its forward PE is above 12, indicating that AU is expected to trade at more times its earnings than its competitors. ABX is expected to grow 18.06% in the next five years, meaning that its P/E ratio in 2014 should end up around 5.58, which is very low but not unusual for the industry.
The other stocks we looked at were similarly low. Analysts estimate NEM will grow at 14.30% a year, leaving its 2014 P/E at 7.78. GFI is expected to grow 17.46% in the next five years, leaving it with a P/E ratio in 2014 of 5.44. GG came the closest to AU’s estimates. Analysts predict GG will grow 16.93%, resulting in a 10.72 P/E ratio.
We used beta as a measure of risk. A beta of 1.0 means that the stock moves with the market. The higher a stock’s beta, generally, the more volatile the stock, and, as a result, the more risky. A lower beta tends to indicate that the stock moves more independently from the market. AU has a beta of 0.59, meaning that it less volatile than many of its competitors. ABX has a beta of 0.71, GFI a beta of 0.72 and GG a beta of 0.68. NEM is the least volatile of the stocks we looked at. It has a beta of just 0.36.
Hedge Fund Ownership
Stocks that are favored by hedge funds tend to outperform the market by a few percentage points on average. NEM was the most popular of the gold stocks we considered. Forty of the hedge funds we track own positions in the company. ABX came in at close second with 39 hedge funds. AU and GG tied at 19, while GFI came in at 17.
We like AU best. It is definitely a strong buy. The company is trading near the bottom of its valuation range, has shown strong earnings historically and, based on its forward P/E ratio, its value is expected to hold. AU has lost more than 16% to date but, based on the numbers, it looks like nothing but upside from here. While there are other stocks in this industry that have lower P/E ratios and offer greater dividends, like Freeport-McMoran Copper & Gold (FCX), or more upside potential like Kinross Gold Corporation (KGC), AU has more consistency. It is a good long position for investors to consider.
As always, we recommend investors to do an in-depth analysis of the stock for their portfolios, before purchasing the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long physical gold.