In light of our Gold Stock Indicator approaching the long term buy signal (found here), we have decided to go over the gold stocks that pay a dividend and are near their respective 52-week lows. In this review, we're going to cover Agnico-Eagle Mines Ltd. (AEM) and Gold Fields Ltd. (GFI). When, and if, the Gold Stock Indicator actually reaches the long-term buy indication, it will be posted to our site. The stocks that we cover here are for you to do additional due diligence before taking any action.
Agnico-Eagle Mines Ltd. closed at $32.37 on Thursday April 5, 2012. Agnico-Eagle is currently operating at an annual loss of -$3.36 according to Yahoo!Finance. Contributing factors to Agnico-Eagle's decline in price over the last year have been problems with the operation of their mines.
As described in many of our previous articles, Edson Gould's Altimeter is based on the stock's price relative to the actual dividend paid. The Altimeter is a critical real-time assessment of value based on the company's dividend. Below is the altimeter for Agnico-Eagle:
In our assessment of Agnico-Eagle, we have compared the current level of the Altimeter at 161.85 and compared it to other times when Agnico-Eagle has traded at the same relative level, or below, and traded up to 400 on the indicator. In the case of Agnico-Eagle there were two periods before the bull market in gold stocks began that the stock was selling at a low and was a great buy (based on the altimeter). In the period from November 2, 1990 to July 3, 1993, Agnico-Eagle rose +174% and in the period from August 25, 1998 to October 4, 1999, it rose +157%.
Since the gold bull market began, the only other time that Agnico-Eagle was selling below 161.85 and subsequently traded up to the 400 level was the period from October 21, 2008 to October 6, 2010 for a gain of 103%, this far exceeded the gains of the SPDR Gold Shares (GLD) over the exact same period of time.
Next in our review is Gold Fields Ltd. Gold Fields sports trailing earnings of $1.22 in the last twelve months and a dividend of $0.61 with a dividend yield of 4.70%. Yahoo!Finance indicates that Gold Fields operates "in South Africa, Peru, Ghana, and Australia." Based on the majority of countries that Gold Fields operates in, there is some political risk to this investment. However, Gold Fields has exhibited amazing consistency in the Altimeter below:
Presently, Gold Fields is trading at the Altimeter level of 42.38. The chart depicts the times when GFI was bought at the 42.38 level and sold whenever the Altimeter reached 100. The results are amazing and provide clear evidence on how gold stocks can outperform the price of gold when combining Edson Gould's Altimeter with our Gold Stock Indicator.
Our approach to buying these stocks is to purchase in two stages, once at, or near, current levels and a second time only if the stocks fall -20% below the initial purchase price. As an example, if we have $10,000 that we'd like to invest, then we buy $5,000 now and hold the remaining funds unless/until the stock declines by -20%. We're basically hedging with cash if we're wrong. If we're right about our first investment (the stock price rises) then we can use the cash to buy another stock near a new low.
Before bothering with the first of many gold stocks that we'll be covering based on our Gold Stock Indicator, please review the following questions and answers:
- Is there downside risk to taking positions in gold stocks at this time? Yes, price declines can reach as much as -50% within the first two months of the purchase.
- Are you comfortable with declines of -50% or more? If not, then don't bother with these stocks at this time. If you're wondering about the logic of recommending anything that might decline by as much as -50% then please read our view on the topic (found here).
- Could these stocks have been held for the "long-term?" Ideally, yes, however, we believe that history is not on the side of gold stocks relative to the price of gold as we described in greater detail in our article titled "A Strategy is Needed For Lagging Gold Stocks".
We believe that Edson Gould's Altimeter, when revealing consistent relative values, yields highly favorable results. While we always seek to purchases at a relative low, we always set a target for selling at higher levels rather than "holding for the long term." Our analysis could change if the stocks mentioned above dramatically increase or decrease their dividend.