Time To Buy Silver Wheaton

| About: Wheaton Precious (WPM)

I finished my latest article on Silver Wheaton (SLW) with the statement that it's a buy in a range of $25.50-$27.00. Some people commented they think that waiting for the stock to drop more can result in missing the rally, should it happen. I would like to address this issue. I believe that it's better to miss the opportunity than to enter at the prices that I think are uncomfortable. Chasing stocks is a bad way to manage your hard-earned money. I'm on the conservative side and so are my articles.

SLW finished at $26.46 on Friday, April 12, after being as low as $26.05. Honestly, I did not expect this drop to happen so fast. While the stock market is mostly ignoring negative economic news, commodities are being hit. Silver prices fell to new lows, and so did the silver ETF (NYSEARCA:SLV), that finished the day at $25.28, a multi-month low. The fundamentals clearly did not change for Silver Wheaton in the last few days, but the stock lost more than 10% since it closed at 29.86 on Tuesday, April 9. I think it is time to get greedy and consider buying SLW.

As a silver streaming company, Silver Wheaton has a nice portfolio of mines from which it buys silver and gold. It deals with mines owned by Goldcorp (NYSE:GG), Hudbay Minerals (NYSE:HBM), Barrick Gold (NYSE:ABX), Vale (NYSE:VALE). The buying price is fixed. For example, SLW buys silver from 777 Hudbay's mine for the price of $5.90 per ounce (sourced from company's annual report) and gold for the price of $400 per ounce. The average silver cash cost for 2012 was $4.06 per ounce, while the average gold cash cost was $362. Such a business model makes a company more predictable. On the other hand, all that Silver Wheaton can do is to manage its portfolio. It could not influence productivity or deal with operating costs.

It is important to notice that Silver Wheaton links dividends to operating cash flow in the previous quarter. As the company's costs are mostly fixed, profitability depends on the silver and gold prices. When prices fall, dividends will fall too. If the company were to reproduce its first quarter dividend of $0.14, the annual dividend yield would be 2.12%. I do not think that dividend is the decisive argument to buy SLW, but it's worth noticing.

The company trades at 16.04 P/E and 12.14 forward P/E. The stock presents value at current levels. As the company's business model is different from other silver stocks, so I would not be comparing SLW to them.

Silver Wheaton presents a terrific way to play silver. The company is not burdened by the costs associated with mining. It has good portfolio and decent buying terms. The main risk is the drop of the silver price. In my opinion, while the stock market is perhaps overestimating the state of the world economy, the commodity market is under undeserved pressure. I do expect silver prices to rebound from current levels, although currently the charts may be looking a little bit scary. Typically, this is the time to step in.

I would recommend buying SLW at current prices. There could possibly be a little more downside for the stock. But I think that at current levels the risk to miss the good price finally exceeds the downside risk. Should the silver prices go even lower, that, of course, would have a short-term impact on SLW. However, I do not see the stock trading at $24-25 for a significant time. If you view silver prices falling for a while, you can consider starting accumulating your position at current levels and adding to it if the stock trades lower. We would know more about how Silver Wheaton handled the environment when its first quarter results would be released on May, 10.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SLW, SLV over the next 72 hours. 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.

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