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Matthew Smith

As global stock markets experience greater volatility due to the ongoing poor global economic outlook and ongoing instability in the eurozone, investors are seeking investments in those market sectors that are still experiencing growth. One of those sectors is the resources sector and this is occurring primarily due to the ongoing resources boom caused by the demand from developing economies, primarily China and to a lesser extent India. This article will analyze five resource stocks that investors are buying and as a result have recently hit new twelve-month highs, to determine whether those stocks still have solid investment potential, despite the strong gains in their stock prices.

Randgold Resources Limited (NASDAQ:GOLD)

Randgold has a market cap of $10.52 billion and a price-to-earnings ratio of 37. Its 52-week trading range is $70.18 to $120.73. Shares are trading around $115. The company reported its 2011 second-quarter earnings of $321 million, a substantial increase from first-quarter earnings of $185.63 million. Second-quarter net income was $113.31 million, a substantial increase from first-quarter net income of $41.49 million. It has quarterly revenue growth of 149.40%, a return on equity of 16.65%, and shares pay a dividend with a yield of 0.20%.

One of Randgold’s competitors is IAMGOLD Corp (NYSE:IAG). IAMGOLD is trading at around $21 and has a market cap of $7.80 billion. It has a price-to-earnings ratio of 9.44, quarterly revenue growth of 74.5% and a return on equity of 15.06%. It pays a dividend with a yield of 0.50%. Based on these key performance indicators, it is underperforming Randgold Resources.

Randgold’s second-quarter 2011 balance sheet showed cash of $405.63 million, an increase from first quarter cash of $352.26 million. It has quarterly revenue growth of 149.40%, versus an industry average of 55.20%, and a return on equity of 16.55%, versus an industry average of 10.30%. This indicates that it is outperforming many of its competitors.

The earnings outlook for the gold industry is positive and is believed to remain so for some time. The key driver of this outlook is the increasing gold price, which is being driven by investors seeking a safe haven from the economic and market volatility that is impacting global stock markets. Recently, in September 2011, the price of gold hit a record high and although it has recently pulled back from that high, the bull-run in gold is likely to continue for the short to medium term, which will see increased revenue growth for gold mining companies. Upcoming Jewish and Christian holidays should provide a seasonal boost to the price of gold.

When the positive industry outlook is considered in conjunction with Randgold Resources’ strong performance indicators and substantial increase in net income, the company is a very attractive investment opportunity. Although ongoing revenue growth is dependent upon on the bull run in gold continuing. At this time when accounting for this risk, I rate Randgold as a buy.

EV Energy Partners L.P (NASDAQ:EVEP)

EV Energy has a market cap of $2.43 billion and a price-to-earnings ratio of 60.65. For the 52-week period its trading range has been $37.24 to $77.96. It is currently trading at around $71. The company reported second-quarter earnings for 2011 as $69.59 million, an increase from first-quarter earnings of $61.02 million. Second-quarter net income was $35.44 million, a substantial increase from first-quarter net income of -$36.24 million. It has quarterly revenue growth of 70.10%, a return on equity of 6.33% and pays a dividend with a yield of 4.10%.

One of EV Energy Partners L.P competitors is Chesapeake Energy Corporation (NYSE:CHK). Chesapeake Energy currently trades at around $26 and has a market cap of $16.41 billion. It has a quarterly revenue growth rate of 54.10%, a return on equity of 9.46% and pays a dividend with a yield of 1.30%. Based on these performance indicators both companies are performing on par.

EV Energy Partners cash position has declined; its second-quarter 2011 balance sheet showed $26.39 million in cash, a decrease from $29.48 million in the first quarter. Its quarterly revenue growth of 70.10% is greater than the industry average of 19.00%, and its return on equity of 6.33% is less than the industry average of 11.40%. These indicators show that EV Energy Partners has greater earning growth prospects than most of its competitors.

The earnings outlook for the Oil and Gas industry is positive due to the ongoing boom in demand for resources driven by the growth of the Chinese economy. This indicates further opportunities for strong revenue growth, which when combined with a weak dollar, should make U.S. exports more competitive, and bodes well for oil and natural gas demand and producers like EV Energy Partners. On the basis of this positive industry outlook combined with the company’s substantial increase in net income I rate the company a buy.

Cabot Oil and Gas Corporation (NYSE:COG)

Cabot Oil and Gas Corporation has a market cap of $8.82 billion and has a price-to-earnings ratio of 61.61. For a 52 week period its trading range has been $33.13 to $84.99. It is currently trading at around $84. The company reported third-quarter earnings 2011 as $262.12 million, an increase from second-quarter earnings of $240.70 million. Third-quarter net income was $28.48 million, a substantial decrease from second-quarter net income of $54.68 million. The company is achieving quarterly revenue growth of 17.00%, a return on equity of 7.47%, and pays a dividend with a yield of 0.10%.

One of Cabot Oil and Gas’s closest competitors is Anadarko Petroleum Corporation (NYSE:APC). Anadarko Petroleum is currently trading at around $78. Anadarko has a market cap of $39.02 billion and has negative earnings of $4.3 at present with a forward price-to-earnings ratio of 23. It has quarterly revenue growth of 34.50%, a return on equity of -10.33%, and pays a dividend with a yield of 0.40%. Based on these performance indicators it is being outperformed by Cabot Oil and Gas.

Cabot's cash position has substantially increased, its third-quarter 2011 balance sheet showed $62.93 million in cash, compared with $39.31 million in the first quarter. Cabot Oil and Gas’s quarterly revenue growth of 17.00%, versus the industry average of 19.00%, and a return on equity of 7.47%, versus an industry average of 11.40%, indicates it is underperforming many of its competitors.

As stated earlier the outlook for the oil and gas industry is quite positive as demand is being fueled by the rapid growth of the Chinese economy and the weaker US dollar is making US exports more attractive for overseas buyers.

Despite the positive industry outlook I believe there are better investment opportunities in the industry primarily due to, Cabot Oil and Gas reporting a decrease in net income and its less than attractive performance measures. Accordingly I rate the company a hold.

Newmont Mining Corporation (NYSE:NEM)

Newmont has a market cap of $34.07 billion and a price-to-earnings ratio of 15.68. Its 52-week trading range has been $50.05 to $72.42. It is currently trading at around $69. It reported second-quarter 2011 earnings of $2.38 billion, a marginal decrease from first-quarter earnings of $2.46 billion. Second-quarter net income was $387 million, a substantial decrease from first-quarter net income of $514 million. Newmont has quarterly revenue growth of 5.70%, a return on equity of 19.57%, and pays a dividend with a yield of 2.00%.

One of Newmont’s competitors is Gold Fields (NYSE:GFI). Gold Fields currently trades at around $18 and has a market cap of $12.62 billion. It has a price-to-earnings ratio of 43.38, quarterly revenue growth of 8.80%, no return on equity and pays a dividend with a yield of 1.60%. Based on these performance indicators it is being outperformed by Newmont.

Newmont’s cash position has substantially declined, the second-quarter balance sheet showed $2.06 billion in cash, compared with $4.66 billion for the first quarter. Newmont’s quarterly revenue growth rate of 5.70% is less than the industry average of 55.20%, and its return on equity of 19.57%, is greater than the industry average of 10.30%. This indicates that it is Newmont Mining Corporation does not have the same earnings growth potential of many of its competitors but it is generating a solid return on equity.

As discussed earlier in this article the earnings outlook for the gold mining industry is currently exceptionally positive. This is due to the rising price of gold, and, at present, most operators do not yet reflect higher prices in their earnings.

Despite the positive industry outlook and Newmont’s solid performance indicators, I do believe there are better investment opportunities in the industry, primarily as Newmont has seen a decrease in both earnings and net income in an environment where gold mining companies should be generating increased earnings. Accordingly I rate the company a hold.

Plains All American Pipeline (NYSE:PAA)

Plains All American has a market cap of $9.51 billion and a price-to-earnings ratio of 15.17. Its 52-week trading range is $54.90 to $66.80. It is currently trading around $64. It reported third-quarter earnings 2011 of $8.84 billion, a marginal decrease from second-quarter earnings of $8.86 billion. Third-quarter net income was $288.00 million, a substantial increase from second-quarter net income of $233.00 million. Plains All American has quarterly revenue growth of 37.80%, a return on equity of 17.34% and pays a dividend with a yield of 6.00%.

One of Plains All American’s closest competitors is Enterprise Products Partners LP (NYSE:EPD). Enterprise currently trades around $44.50 and has a market cap of $37.65 billion. It has a price-to-earnings ratio of 22.88, quarterly revenue growth of 40.40% and no return on equity. It pays a dividend with a yield of 0.20%. Based on these key performance indicators it is being outperformed by Plains All American.

Plains All American’s third quarter 2011 balance sheet showed cash of $14 million, a decrease from second quarter 2011 of $23 million. Plains All American Pipeline quarterly revenue growth of 37.80%, versus an industry average of 12.60%, and a return on equity of 17.34%, versus an industry average of 11.30%, indicates that it is outperforming the majority of its competitors.

The earnings outlook for the oil and gas pipeline subsector is quite positive with this outlook being driven by the high demand for oil and gas from China. While liquid gas exports remain limited, pricing pressure is still present. When this is combined with the devalued US dollar and better-than-expected manufacturing sector results, it bodes well for oil and gas suppliers such as Plains All American.

The positive industry outlook combined with the company’s solid performance indicators and substantial increase in net income makes it a compelling investment opportunity. Accordingly, I rate Plains All American as a buy.

Source: 5 Resource Stocks That Investors Are Buying Like Crazy