My October Strategy And Analysis Of Nevsun Resources Limited

| About: Nevsun Resources (NSU)

Summary

My October strategy which takes advantage of the Summer -Fall swoon, tax loss selling and Mutual Fund window dressing is outlined.

The strategy attempts to identify candidates which are primed to bounce back within three to six months. One such candidate is Nevsun Resources Limited.

Nevsun Resources is generating lots of cash, pays a good dividend and is trading below tangible book. However the company operates in Eritrea, and faces significant geopolitical risks.

I am in the camp of investor's who believes the 10% or so draw down we have seen recently is not a prelude to a bear market and the stock market will start to bounce back by year end. Every October I run a screen to find beaten down stocks which are fundamentally sound, which Mr. Market has thrown under bus in its regular Summer-Fall hissy fit. The idea is to pick up solid long candidates which can bounce back quickly when volatility subsides. This year the hissy fit started a bit early so I decided to run the screen in September. The logic of the screen is as follows:

Screen (My October strategy) Summary:

(Current Assets ($ mil) - Latest Quarter > Total Liabilities ($ mil) - Latest Quarter)

This parameter ensures that the company is strong financially and is "bankruptcy proof"

and

(% Above 52-Week Low < 11)

The company is cheap on a 52 week basis trading at the bottom 10% of its annual range. This means the stock is ripe for tax loss selling.

and

(Percent Owned by Mutual Funds > 30)

Many mutual funds hold this stock. Mutual funds engage in tax loss selling and sell losing position during the Fall so as to "window dress" their results for investors, in preparation for year end. Lots of mutual fund ownership also ensure good liquidity in the market making the stock easier to trade.

and

(% Above 5-Year Low <= 30)

This is another check for cheapness that the stock is trading in the bottom 1/3rd of its 5 year range.

I ran this screen on the Morningstar database. It's spat out the following names. I typically select a few names look intriguing to me. The screen has been consistently profitable for me over the last few years.

Ticker

Name

$ Current

Price

% Change

52-Week

High

52-Week

Low

%

Dividend

Yield TTM

% Dividend

Growth

5 Year

%

Payout Ratio

TTM

Price/

Earnings

Trailing

Price/

Earnings

Forward

Price/

Earnings

5 Yr Avg

% Proj

EPS Growth

Next Year

% ROE

5 Year

PEG

Ratio

Price/

Cash Flow

Price/

Cash Flow

3 Yr Avg

Book

Value/Share

Latest Qtr

% ROE

TTM

Price/

Book

TTM

Price/Book

5 Yr Avg

Price/Sales

5 Yr Avg

Price/

Sales

Beta

3 Year

IPI

Intrepid Potash Inc

7.33

-2.91

16.77

6.96

0

0

87.46

29.41

-80.34

3.11

6.58

4.25

9.48

12.48

0.65

0.57

1.97

4.24

1.38

0.42

GOLD

Randgold Resources Ltd ADR

57.15

-2.41

85.84

55.66

1.05

31.95

26.59

24.71

22.32

33.37

1.15

12.19

14.08

16

34.1

6.8

1.64

3.27

8.18

4.84

0.11

CREE

Cree Inc

25.85

-2.34

44.83

23.36

0

0

-44.59

26.11

48.31

1.2

2.77

0.93

15.75

18.67

23.88

-2.35

1.05

1.93

4.03

1.75

1.19

FOSL

Fossil Group Inc

59.74

-2.16

115.2

56.01

0

0

8.48

13.28

17.76

0.82

30.37

0.95

7.53

13.95

17.3

38.06

3.38

5.18

2.08

0.87

1.01

FOR

Forestar Group Inc

12.22

-2.08

19.78

11.45

0

0

-8.44

35.97

49.23

2.58

2.39

3.59

6.59

1.47

19.88

-7.02

0.6

1.08

4.05

1.9

1.47

GHL

Greenhill & Co Inc

32.79

-2.06

49.72

32.63

5.49

0

105.77

18.87

15.7

43.21

1.31

15.44

0.9

7.87

16.37

9.82

19.72

3.27

5.63

5.9

3.23

1.55

FLR

Fluor Corp

43.66

-2

73.69

41.88

1.92

10.93

18.51

9.43

10.18

22.54

1.03

15

1.92

15.58

17.17

21.5

17.05

1.99

2.94

0.45

0.32

1.29

NTAP

NetApp Inc

30.57

-1.99

43.75

28.88

2.21

37.8

17.16

12.95

26.5

1.12

15.67

1.38

7.58

9.87

11.19

15.55

2.68

3.9

2.72

1.57

0.52

RAVN

Raven Industries Inc

17

-1.85

27.57

16.3

3.06

12.7

89.1

28.61

24.9

23.34

11.95

19.03

7.89

7.89

2.12

5.39

2.93

1.97

1.19

HAYN

Haynes International Inc

37.48

-1.83

52.05

34.8

2.35

35.24

14.74

51.59

7.99

10.98

14.95

29.44

8.64

1.25

2.02

1.26

0.93

1.2

NTGR

Netgear Inc

28.8

-1.81

36.7

28.12

0

0

-112.86

11.11

20.06

1.52

9.6

9.53

19.42

20.53

-1.21

1.37

1.92

1.12

0.77

0.82

CMTL

Comtech Telecommunications Corp

25.83

-1.6

40.69

24.82

4.65

76.93

16.3

24.39

7.2

13.33

19.45

24.81

6.75

1.02

1.14

1.69

1.32

1.7

COHU

Cohu Inc

9.49

-1.56

13.84

9.14

2.53

5.92

75.32

29.3

-49.21

0.3

10.2

42.46

9.16

2.06

1.02

1.11

1.07

0.74

0.09

ADTN

Adtran Inc

15.51

-1.21

24.13

14.7

2.32

0

72.84

30.97

19.42

25.93

1.83

13.16

1.55

15.17

20.68

9.92

4.96

1.54

2.64

2.63

1.34

0.65

PKE

Park Electrochemical Corp

17.06

-1.16

27.64

16.53

2.34

2.13

50.3

21.21

17

3.2

25.41

20.72

8.6

8.68

1.96

1.86

3.03

2.33

0.86

NWPX

Northwest Pipe Co

15.47

-1.02

36.98

14.9

0

0

-6.54

-19.84

-26.23

0.44

0.75

3.36

7.62

24.26

-9.55

0.63

1.01

0.55

0.41

1.74

QSII

Quality Systems Inc

13.16

-0.98

18.75

12

5.32

3.13

149.47

27.82

23.04

97.62

1.21

17.56

1.77

11.69

13.93

4.64

10

2.81

5.62

3.73

1.6

0.8

RGLD

Royal Gold Inc

45.85

-0.91

77.2

45.03

1.9

19.97

109.03

56.95

28.09

57.44

1.3

3.75

15.41

25.62

36.1

2.21

1.26

1.98

15.24

10.64

0.48

CPSI

Computer Programs and Systems Inc

45.09

-0.77

64.86

43.1

5.52

16.12

97.22

17.98

17.09

21.57

1.32

47.98

1.9

11.8

19.28

7.11

35.41

6.29

10.11

3.26

2.56

0.78

ESIO

Electro Scientific Industries Inc

4.48

-0.44

7.95

4.09

3.57

-3.28

-13.57

41.94

-0.73

-10.22

-5.31

7.36

5.57

-21.82

0.8

1.13

1.57

0.83

1.16

BBOX

Black Box Corp

14.71

-0.41

24.91

14.5

2.79

10.76

52.09

18.61

8.76

10.13

-9.9

5.03

8.67

22.06

3.52

0.67

0.88

0.48

0.23

0.94

CLMS

Calamos Asset Management Inc Class A

9.69

-0.31

14.44

9.42

6.19

20.11

108.53

17.46

14.19

9.05

3

2.3

9.8

5.07

0.99

1.26

0.83

0.75

1.33

HWCC

Houston Wire & Cable Co

7.53

-0.13

14

7

6.37

6.69

95.3

14.93

18.8

13.81

4.34

-15.12

6.17

8.08

1.22

2.28

0.62

0.38

1.3

NSU

Nevsun Resources Ltd

2.78

0

4.51

2.57

5.58

44.93

8.06

21.6

-11.76

0.7

14.93

2.31

6

3.42

10.48

0.81

2.64

1.1

1.33

IVAC

Intevac Inc

4.72

2.83

8.3

4.55

0

0

-5.41

-12.42

-4.23

0.69

-12.97

-10,283.22

-30.1

4.03

-19.82

1.2

1.22

1.99

1.52

1.08

In this article I will briefly review one of the stocks which I am interested in investing. I can review more if there is interest from readers in subsequent articles.

Nevsun Resources Ltd

Nevsun Resources Ltd (NYSEMKT:NSU) is a Canadian mineral mining company (Market cap Cad$ 737.2 mi) operating the Bisha mine in Eritrea. The Bisha mine is an open pit mine that produces gold, silver and copper concentrate for export to world markets. Nevsun is the operator and owns 60% of the mine and the Eritrean Mining corporation (ENAMCO) 40%. It is now transitioning to a Zinc producer with Zinc production starting in 2016.

The Bisha Main deposit is located within the Bisha Mining License and the Harena satellite deposit lies in a separate Mining License 6 kilometers south, connected by a flat unsealed road. Bisha Main and Harena currently make-up 100% of the mineral reserves for Bisha. The Bisha Main deposit is a high grade VMS deposit. It is configured in three distinct layered zones - a 35 meter thick surface gold-silver oxide zone (mined out in mid-2013) immediately overlying a copper enriched supergene (close to surface) zone which itself overlies a primary sulphide zone containing both zinc and copper, and which remains open at depth.

Source: Company presentation.

There is anticipated shortage of zinc in the next couple of years and demand is expected to outstrip supply.

Zinc spot prices are starting to recover

Key Stats for NSU are given below (source Morningstar.com)

Price/Earnings TTM

8.1

Price/Book

0.8

Price/Sales TTM

1.1

Rev Growth (3 Yr Avg)

0.4

Net Income Growth (3 Yr Avg)

-14.1

Operating Margin % TTM

41.8

Net Margin % TTM

13.7

ROA TTM

7.1

ROE TTM

10.5

Debt/Equity

No debt

NSU is trading below tangible book value.

Balance sheet is robust. No debt and Cad$ 450 million in cash. (Source: Author with data from Gurufocus.com)

NSU has robust free cash flow:

Operating Cash flow easily covers Capex and dividend.

The 5% dividend is well covered.

The big black mark against Nevsun is that the company's asset is in Eritrea, not exactly a leading light in stability and democracy (authoritarian presidential regime, i.e., dictatorship) and all the attendant geo-political risks. There have been allegation against Nevsun and Eritrean government on its human rights record. However there is no direct evidence that the company itself is any way involved. Basically the Bisha mine is a partnership (60:40) with the Eritrean government with the former bringing in investment and know-how. There is a continual low level war between Ethiopia and Eritrea. Overall, Nevsun operates in a nasty corner of the world, but you don't get a Cash Return of >30% a year, for no risk. The company itself is self-financing and you are getting a 5% dividend, at the very least at these prices.

Closing Remarks

I hope the above screen gives you some ideas for short/medium term trades. My modus-operendi has been to buy some of these candidates in the Fall swoon and sell them in the Jan-Feb time frame. I have consistently made money with this trading strategy over the last few years (except 07 - 09). I am hoping recent history will repeat itself.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Additional disclosure: All figures in Canadian dollars. The company trades on both the TSX and the NYSE.

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