The stock market may be in a correction and more volatile than it has been in three years but despite the red everywhere there is one leading sector that is outperforming every other sector during this pullback and actually has fundamentally very strong stocks already hitting new 52-week highs on very strong volume.
The Mining-Gold/Silver/Gems industry group sports a 99 RS rating, putting it in the top 1% of all industry groups based on price performance over the last six months. Now, there is no question why gold is a safe haven during a time when the Fed, Congress, and the White House have completely failed the American people. If the macro environment continues to encounter headwinds in the intermediate term, you can be sure that not only will gold continue to be a safe haven but the profits coming out of the stocks listed below will allow these stocks to rally higher along with physical gold. Let’s take a look at the best-of-the-best in this group.
Royal Gold (NASDAQ:RGLD), Minefinders (MFN), Randgold (NASDAQ:GOLD), Aurico Gold (NYSE:AUQ), Endeavour Silver (NYSE:EXK), and New Gold (NYSEMKT:NGD) sport characteristics that indicate these could see huge price performance throughout the rest of the year. We know that the best stocks during any cycle have these characteristics in common: They all sport large current earnings and sales growth; big annual EPS growth with strong future estimates; are liquid in their trading volume; are leaders in their industry price wise; are part of a leading industry group compared with RS performance of the S&P 500 (NYSEARCA:SPY) over the last six months; have plenty of mutual fund sponsorship; and have solid profit margins, low debt, and a high return-on-equity. Let’s take a look at each stock and the fundamentals behind it that should propel it to further stock gains.
Royal Gold (RGLD) has shown huge earnings growth the past seven quarters with Y-O-Y quarterly gains of 800%, 67%, 50%, 24%, 22%, 75%, and 86%. Sales growth during the past eight quarters has been 62%, 138%, 68%, 83%, 74%, 62%, 59%, and 46%. Annual earnings growth estimates for 2012 and 2013 are for gains of 42% and 17% respectively. The company’s debt-to-shareholder equity is 16%, cash flow is $1.24, and it sports a P/E ratio of 54, which is in the lower half of its historical 5-year range. Another positive is mutual fund sponsorship has increased from 331 funds to 345 funds the past three quarters.
Minefinders (MFN) has grown its EPS 157%, 999%, and 999% the past three quarters as it recently turned into a profitable company. Sales growth during those three quarters was 12%, 98%, and 239%. Annual earnings growth estimates for 2011 and 2012 are for gains of 999% and 36% respectively. The company sports a debt-to-shareholder equity level of 13%, cash flow of $0.28, a return-on-equity of 2%, and a P/E ratio of 24. While these numbers are not as powerful as other leading stocks in this group clearly the future looks bright as mutual fund ownership has grown from 119 funds to 135 over the past four quarters.
Randgold (GOLD), one of my personal favorites, has grown its EPS 800%, 192%, 50%, 100%, 86%, -17%, 114%, and 221% the past eight quarters. During that time sales growth was 32%, 78%, 40%, -1%, 12%, 4%, 52%, and 213% . Annual earnings growth is expected to come in at 290% and 45% for 2011 and 2012 respectively. Debt-to-shareholder equity is 0%, cash flow is $1.44, return-on-equity is 6%, and it has a 45 P/E ratio, which is in the lower half of its five-year range. During the past three quarters mutual fund ownership has also increased from 244 funds to 256 funds.
New Gold (NGD) EPS growth the past four quarters come in at 250%, 999%, 200% and 200%. During the past eight quarters sales growth has been explosive with gains of 80%, 259%, 129%, 90%, 44%, 44%, 68%, and 53%. 2011 and 2012 annual earnings growth is expected to come in at 33% and 30%. The debt-to-shareholder equity is only 12%, return-on-equity is 7%, cash flow is $0.52, and the P/E ratio is also at its historical low end at 24. This stock has been actively bought by institutions over the past year as fund ownership has increased from 218 funds to 340 as of the most recently reported quarter.
Aurico Gold (AUQ) has seen its quarterly earnings growth increase 400%, -17%, 31%, 999%, and 33% over the past five quarters. Sales growth during the past seven quarters has been strong with gains of 41%, 16%, 32%, 16%, 4%, 29%, and 98%. 2011 and 2012 annual earnings estimates are for gains of 158% and 330% respectively. Debt-to-shareholder equity is only 4%, cash flow is $0.71, return-on-equity is 7%, and its P/E ratio is a very low 22. Mutual fund ownership is also increasing in this gold stock, going from 168 to 198 over the past four quarters.
Last but not least, Endeavour Silver (EXK). Earnings growth was reported in six of the the past seven quarters with gains of 155%, 200%, n/a, 133%, 17%, 500%, and 340%. During the same period sales growth has been 207%, 115%, 139%, 105%, 17%, 94%, and 85%. Estimates for annual EPS growth for 2011 and 2012 are for gains of 663% and 64% respectively. Return-on-equity is 5%, cash flow is $0.21, debt-to-shareholder ratio is 0%, and the P/E is a low 28. Fund ownership has increased from 36 funds to 51 funds over the last four quarters.
As you can see above all of these mining-silver/gold stocks have fabulous EPS and sales growth that also come with the stocks being cheap on a P/E ratio basis compared with their five-year historical range. On top of that, the stocks have been under very heavy accumulation during the market pullback, which has brought all of them to either new 52-week highs or close to it. That is very bullish and shows extremely strong Relative Strength to the S&P 500.
While fundamentals rule what I buy, technicals tell me where I should buy to give me the best risk/reward ratio possible. I am looking to grab any or all of these stocks on low volume pullbacks to either their 10- or 50-day moving averages where I will initiate long positions if they bounce off or through these lines on very strong volume. If the trade goes wrong after these bounces I will be happy to cut my loss small with a close below the 10- or 50-day moving averages.
There are not many quality stocks out there that have not been trashed during this recent market correction. Gold and gold stocks show no signs of distribution and big price gains should be realized as we head out of 2011.