Silver Wheaton: Struggling With Global Uncertainty

| About: Silver Wheaton (SLW)

Summary

Silver Wheaton has been a complete disaster since I initiated my position in the name.

Despite having just started its decline in late August, Silver Wheaton was initiated as a “Buy” at Deutsche Bank in early September.

The price of commodities are dependent on the global macroeconomic news and so long as there is uncertainty in the world there will be uncertainty in the commodity related companies.

Silver Wheaton (NYSE:SLW) has been a complete disaster since I initiated my position in the name. The stock was trading at high of $31.35 during the late dog days of summer but has plummeted to $22.57 as of this moment. That is good for a drop of 28% in just two months, albeit the stock is up 56.1% over the past year. I was not fortunate enough to jump into the name then so I have to deal with my current situation accordingly.

Despite having just started its decline in late August, Silver Wheaton was initiated as a "Buy" at Deutsche Bank (NYSE:DB) in early September. The German bank going through a bit of turmoil itself right now slapped a$37 price target for Silver Wheaton when they made the call on the name. The reason for the upgrade was because of strong projected cash flows while the company was set to add another eight projects to an already existing portfolio of 22 projects. But all this was before the price of silver and gold started to plummet, from which the cash flows are dependent upon. Yes Silver Wheaton has very well geographically diversified assets and low operating costs but all that pales in comparison if the source of their client's revenue streams are dropping.

Silver Wheaton is a very volatile stock and despite this volatility in the overall global macroeconomic picture the CEO Randy Smallwood hinted at making some deals in the space with smaller players in the mining industry. By making small investments in smaller mining companies Silver Wheaton is essentially stepping up to the plate to hit a home run should the miner also hit it big. With what Mr. Smallwood estimates to be approximately $2B worth of deals waiting to be made the miners should not be as eager to make a deal because margins are compressing for them now as the price of their commodities have been dropping. There isn't really any need to compress their margins even more by financing through Silver Wheaton when there are equity offering options available to them. Silver Wheaton currently has about $191M of cash and equivalents on the balance sheet should they choose to make a deal with a small mining company.

The price of commodities are dependent on the global macroeconomic news and so long as there is uncertainty in the world there will be uncertainty in the commodity related companies. Every time the Fed says they are going to increase rates the commodities plummet, but we know they have not stayed true to their word this entire year and every time they decide not to increase rates it propels the commodities higher. The silver lining here is that Silver Wheaton's costs are predictable, its business model is predictable, and however, the client's businesses are less predictable and will continue to fluctuate as long as there is uncertainty in the world.

Gold recently dropped below $1300 an ounce and this proved to be costly for miners as they saw their stocks plunge since the late summer as investors turned to equity related investments. Now that it is equity investments taking it on the chin it might mean a turnaround for commodity related stocks as it is less likely the Fed will raise interest rates next time around due to the global uncertainty.

I actually initiated my position in Silver Wheaton in late September and have been pretty upset with the purchase thus far. So far, I'm down 99.2% on an annualized basis, but will not purchase shares until they get below $20, because I believe that is where it offers additional value. I've selected $20 because it is the midway point of the 52-week range.

I swapped out of O'Reilly (NASDAQ:ORLY) for Silver Wheaton during the 2016 third quarter portfolio change-out because I ended up turning a profit in the name (0.1%, or 0.5% annualized) and wanted to lock in those profits. Since the swap, I have lost out on a lot of gains, as O'Reilly has outperformed the Silver Wheaton since the swap. For now, here is a chart to compare how Silver Wheaton and O'Reilly have done against each other and the S&P 500 since I swapped the names.

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When it is all said and done, it matters what the stock has done in an investor's portfolio at the end of the day. For me, Silver Wheaton is one of my smaller positions and has been doing nothing, as I'm down 16.9% on the name, while the position occupies roughly 3.7% of my portfolio. I will only make additional purchases in the name if it hits $20 as I stated earlier. I own the stock for the speculation portion of my portfolio, and I will continue to hold onto the stock for now. My portfolio is up 6% since inception, while the S&P 500 is up 2.7%. Below is a quick glance at my portfolio and how each position is performing. Thanks for reading, and I look forward to your comments.

Company

Ticker

% Change incl. DIV

% of Portfolio

The Priceline Group Inc.

(NASDAQ:PCLN)

27.68%

6.21%

Electronic Arts Inc.

(NASDAQ:EA)

11.32%

4.08%

Southwest Airlines Co.

(NYSE:LUV)

8.65%

11.47%

KLA-Tencor Corporation

(NASDAQ:KLAC)

3.23%

5.38%

AbbVie Inc.

(NYSE:ABBV)

1.00%

3.28%

Target Corp.

(NYSE:TGT)

0.25%

7.81%

T. Row Price Group, Inc.

(NASDAQ:TROW)

-3.72%

10.94%

Diageo plc

(NYSE:DEO)

-5.44%

4.23%

Signet Jewelers Limited

(NYSE:SIG)

-10.30%

11.54%

Gilead Sciences Inc.

(NASDAQ:GILD)

-13.20%

15.85%

Silver Wheaton Corp.

-16.88%

3.72%

SIG OCT 21 2016 85.00 CALL (Open)

-84.52%

0.20%

DEO OCT 21 2016 120.00 CALL (Open)

-95.36%

0.02%

Cash

$

15.27%

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Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade, and happy investing!

Disclosure: I am/we are long SLW.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.