The stock market took a turn for the worst last Friday, with the SP 500, Nasdaq, and Dow Jones Industrial Average all losing their 200 Day Moving Average. Back on April 23rd I penned this instablog explaining exactly why the stock market was topping. That article has proven quite prescient but that should not be a surprise as history always repeats itself in the stock market.
When the overall stock market indexes enters a correction, there are usually a few industry groups like tobacco, food, and utilities (my article last week discusses this) that do well. On Friday, they all got hit.
One group that consistently does well in bear markets when every other sector is being sold is the Gold-Gold Miners sector. Today, I want to go over the four highest quality stocks in this sector based on EPS growth, sales growth, and other various fundamental factors that show up in the best performing stocks before they go on to produce large gains. These characteristics show up in all major winning stocks going back 130 years.
First up is the new kid on the block Franco Nevada Corporation (FNV). Franco Nevada Corporation is a Toronto, ON gold-focused royalty and stream company with over 340 royalty and stream property interest.
EPS growth has been on a tear lately, growing 171%, 333%, 158%, 55%, and 63% the past five quarters. Driving the EPS growth has been revenue growth which has grown 11%, 34%, -7%, 56%, 112%, 106%, 58%, and 44% the past eight quarters. This growth is expected to continue into the near future, with annual EPS estimates for gains of 24% each for 2012 and 2013.
Franco Nevada Corporation has 0% debt to shareholder equity, a return on equity of 6%, a cash flow of $1.93 a share, an EPS growth rate of 30%, and spends 0.6% of sales on R&D. The current P/E ratio of 35 is also in the lower end of its short historical range of 32-50.
Mutual funds are taking an interest in this company as fund ownership has grown from 329 funds eight quarters ago to 464 currently. Management also has a stake in the future success of the company, owning 4% of the shares outstanding.
Second up is a huge growth stock Eldorado Gold Corporation (EGO). Eldorado Gold Corporation is a Vancouver, BC company that acquires, explores, and produces gold and mineral properties in Turkey, China, Brazil, and Greece.
Eldorado Gold Corporation's EPS growth is on fire, growing 43%, 63%, 0%, 11%, 40%, 46%, 100%, and 30% the past eight quarters. This growth is a direct byproduct of its revenue growth which has grown 158%, 133%, 47%, 21%, 22%, 71%, 42%, and 24% the past eight quarters. The near-term future looks solid with 2012 and 2013 annual EPS estimates for gains of 21% and 20% respectively.
Eldorado Gold Corporation has 0% debt to shareholder equity, a return on equity of 10%, a cash flow of $0.80 a share, a dividend yield of 1.6%, and an EPS growth rate of 45%. The P/E ratio is at the low end of its 5-year range of 9-73 at a current 18.
Surprisingly, mutual fund ownership hasn't really picked up for this company, with 677 funds owning the stock compared to 658 eight quarters ago. Management has 0% ownership of the shares outstanding. This is also a bit disappointing as management ownership indicates vested interest in making sure your company produces results.
Next up are my two personal favorites based on a combination of fundamentals and technicals. The first favorite is Royal Gold Inc. (RGLD). Royal Gold Inc. is a Denver, CO owner and manager of royalty interest in precious metal mines in 14 countries.
EPS growth for Royal Gold Inc. has been stellar, with gains of 50%, 24%, 22%, 75%, 86%, 105%, 27%, and 26% the past eight quarters. Revenue growth is just as exciting, with gains of 83%, 74%, 62%, 59%, 46%, 42%, 22%, and 25% the past eight quarters. 2012 and 2013 annual EPS estimates are for gains of 38% and 29% respectively.
Royal Gold Inc. has 14% debt to shareholder equity, a return on equity of 5%, a cash flow of $2.56, a dividend yield of 0.8%, an EPS growth rate of 16%, and spends 4.2% of sales on R&D. The P/E ratio is currently at 40 which is in the lower end of its 5-year range of 31-110.
Mutual fund ownership has not increased that much over the past 8 quarters, growing from 315 to 335 currently. Management owns 6% of the shares outstanding, showing that they are vested in making sure the stock appreciates.
Finally, my personal favorite, Randgold Resources ADR (GOLD). Randgold Resources ADR is a United Kingdom company engaged in the exploration and development of gold properties primarily in Mali and Cote D'Ivoire.
Randgold Resources ADR's EPS growth is simply exciting, growing 100%, 86%, -17%, 114%, 221%, 342%, 331%, and 113% the past eight quarters. Revenue growth is right on par with EPS growth, growing 12%, 4%, 52%, 213%, 167%, 117%, and 46% the past seven quarters. Annual EPS estimates for 2012 and 2013 are for gains of 54% and 11% respectively.
Randgold Resources ADR has 0% debt to shareholder equity, a return on equity of 19%, a wonderful cash flow of $5.01 a share, a 0.4% dividend yield, and an EPS growth rate of 46%. The P/E ratio is currently at the bottom end of its 5-year range of 16-173 at a current 17.
Mutual fund ownership, like the last two stocks, has not changed too much from eight quarters ago, growing from 276 to 283 funds. Management only owns 1% of the shares outstanding.
Fundamentals are the most important aspect of picking winning stocks. However, I am a trend follower and therefore use technical analysis. This methodology is used to time my trades so that I can be most successful when I am correct while risking little to the downside if my analysis is incorrect.
Now that all of these stocks have established intermediate higher highs and higher lows on their daily and weekly charts, I will be looking to buy all of these stocks with proper moves off their 10 day and 50 day moving averages.
All of these stocks, besides Eldorado Gold Corporation, are above their 50 day moving averages. When these stocks bounce off this important technical line on strong volume I will begin my buying. If this buying is proven successful, I will continue to add to my long positions with subsequent high volume rallies off the 10 day moving average.
If, at any time, these stocks fail these key moving average lines, I will cut my loss and move on to the next trade.
Cutting losses is the only methodology that can prevent anyone from blowing up their account. If you cut losses, you ensure that you will survive another day if you are wrong. In the stock market, you are going to be wrong a lot. Get used to it. If you do not cut losses, when you are wrong, one day, you will take the ultimate loss.