When it comes to such commodities as gold, there are so many ancillary variables such as political unrest, national consumption and the recommendations of analysts for potential investors to consider. In this article, I'm going to focus on the recent downgrade of one gold company in particular, Great Basin Gold (NYSEMKT:GBG), and highlight two alternatives I'm considering at current levels.
Great Basin Gold opened trading at $0.23/share on Friday after it was reported that the company was downgraded by BMO Capital Markets from a "Market Perform" rating to an "Under Perform" rating. There really isn't much to like about Great Basin Gold at these levels, especially since the company has either been right in-line or missed EPS estimates heavily over the last four quarters. With both profit margins (-23.60%) and operating margins (-33.97%) in the negative over the last 12 months, and returns on equity (-7.17%) and assets (-3.79%) also negative over the same period, I'd look elsewhere for a position in the gold sector.
Where would I begin to look for alternatives? I'd consider a position in Barrick Gold (NYSE:ABX) for several reasons. First and foremost, China National Gold may be looking to acquire the company in an effort to increase its production-to-consumption ratio, which is currently a very weak 0.45. Second, if we were to compare ABX's margins and returns on both equity and assets to that of GBG, we'd see a significant difference. Over the last 12 months, ABX demonstrated an operating margin of 42.04%, a profit margin of 27.85% and returns on both assets of equity of 8.02% and 16.32%, respectively.
Is there another alternative to consider from more of an income perspective? There are actually two gold stocks I'd like to focus on from an income standpoint. The first company that comes to mind is Gold Fields Ltd. (NYSE:GFI), which currently yields 4.50% ($0.61) and has demonstrated both solid margins and solid returns on assets and equity over the last 12 months. The company has demonstrated a profit margin of 18.15%, an operating margin of 30.39%, and returns on assets and equity of 10.58% and 17.89%, respectively. It should be noted that GFI has increased its quarterly distribution in every quarter since its February 24, 2010, distribution. The second company to consider from an income standpoint is Gold Resource Corp. (NYSEMKT:GORO), which currently yields 3.90% ($0.72) and has demonstrated excellent returns on both assets (49.66%) and equity (100.59%) over the last 12 months. I think if GORO can establish better strength in EPS and production, the stock could either come in-line or surpass the quarterly growth estimates of 178.90% analysts are predicting.
I honestly think potential investors looking to establish a position in the gold sector should avoid Great Basin Gold at all costs and as an alternative consider a position in either Barrick Gold, Gold Fields Ltd., or even Gold Resource Corp. There are many angles to consider from both a growth and income perspective and investors should take such things as margins and returns on both equity and assets into consideration. Variables such as EPS performance and gold production should be considered. Small- to medium-sized positions should be established in the three alternative companies at current levels and be additional share should be consider as EPS or dividend dates approach.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.