I have been reading some articles on Newmont Mining Corp (NYSE:NEM), and I noticed that authors described the soaring in this gold stock's share price as a "gaining momentum" on the stock market.
What does it really mean when a stock is gaining momentum on the stock market?
I looked for some definition about "gaining momentum" on the internet and I found this one:
Momentum is the rate of acceleration of a security's price or volume. The idea of momentum in securities is that their price is more likely to keep moving in the same direction than to change directions.
For a gold mining stock the context to identify if the stock is gaining momentum is the stock market and to measure if it is speeding up is the gold price.
That is, the stock market (S&P 500 for example) and the gold price are the benchmark to identify and measure whether a gold stock is gaining momentum.
Many investors and authors see NYSE:NEM gaining momentum, because the company's stock price has been rising over the last thirty days due to the growth in gold price.
NYSE:NEM IS SPEEDING UP COMPARED TO CHANGES IN THE GOLD PRICE
The stock declined by 57.53% over the last 5 years, while the stock market (S&P 500) rose 45.28% during the same period.
The gold stock surged 50.00% over the last month, while the stock market (S&P 500) rose only 3.14% over the same period.
The price of gold increased with 11.1% over the last month, from $1,089.200 per troy ounce (January 18, 2016) to $1,210.000 per troy ounce (February 17, 2016).
The average daily return on gold is 0.49% and the average return on gold is 10.76%, over the last 30 days.
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Source: Ice Benchmark Administration, Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars [GOLDPMGBD228NLBM], retrieved from FRED, Federal Reserve Bank of St. Louis research.stlouisfed.org/fred2/series/GOL..., February 20, 2016.
I want to measure the exposure of the return on the gold stock to the changes in the price of gold.
Historical exposure of NYSE:NEM to changes in the price of gold
In one of my previous articles on NYSE:NEM I estimated beta1 (the exposure of the gold mining stock to change in S&P 500) and beta2 (the exposure of the gold mining stock to change in gold price). The estimates were made on monthly data from February 1, 2004 to January 1, 2015: almost 11 years, 131 observations! Including the bull market in gold (let's say from July 20, 1999 to September 5, 2011). In July 20, 1999 the price of gold was $252.800 per troy ounce and in September 5, 2011 the price of gold was $1,895.000 per troy ounce.
As you can see, 4 out of 11 values for beta1 have a t-stat > 1.96, which means that the return on the stock market (S&P 500) variable is statistically significant in 36.4% of cases. While 11 out of 11 values for beta2 have a t-stat > 1.96. The return on gold is statistically significant to explain the return on gold mining stocks in all cases. The average of beta gold is 1.53.
In statistics, the t-statistic is a ratio of the departure of an estimated parameter from its notional value and its standard error. It is used in hypothesis testing, for example in the Student's t-test.
As you can see from the table above beta gold of NYSE:NEM is 1.24 calculated over the period February 1, 2004 to January 1, 2015. This value for the parameter means that the gold mining stock was slightly more volatile than the gold price but below gold stock industry average over the period observed. NYSE:NEM was the less volatile gold stock among its "peers".
Now I will estimate the betas over the year 2015. The estimates are made on monthly data. Below you can find the results of the multiple regressions:
SUMMARY OUTPUT | ||||||
YEAR 2015 | ||||||
Regression Statistics | ||||||
Multiple R | 0,79511466 | |||||
R Square | 0,632207322 | |||||
Adjusted R Square | 0,550475616 | |||||
Standard Error | 0,097888545 | |||||
Observations | 12 | |||||
ANOVA | ||||||
df | SS | MS | F | Significance F | ||
Regression | 2 | 0,148239077 | 0,07412 | 7,735154 | 0,011097211 | |
Residual | 9 | 0,086239506 | 0,009582 | |||
Total | 11 | 0,234478583 | ||||
Coefficients | Standard Error | t Stat | P-value | Lower 95% | Upper 95% | |
Intercept | 0,032138072 | 0,030244414 | 1,062612 | 0,315638 | -0,036279545 | 0,100555688 |
ret mkt (S&P 500) | 0,852251587 | 0,718091438 | 1,186829 | 0,265677 | -0,772184098 | 2,476687273 |
ret gold price | 3,748222636 | 1,026347385 | 3,652002 | 0,005301 | 1,426463553 | 6,06998172 |
Explanation of abbreviated terms:
Multiple R, R^2, adjusted R^2, are coefficients of determination. The coefficient of determination is a number that indicates how well data fit a statistical model.
Standard error: "A standard error is the standard deviation of the sampling distribution of a statistic. Standard error is a statistical term that measures the accuracy with which a sample represents a population. In statistics, a sample mean deviates from the actual mean of a population; this deviation is the standard error."
Analysis of variance (ANOVA) is a statistical analysis tool that separates the total variability found within a data set into two components: random and systematic factors. The random factors do not have any statistical influence on the given data set, while the systematic factors do. The ANOVA test is used to determine the impact independent variables have on the dependent variable in a regression analysis.
In this article (editor's pick) I explained the meaning of the p-value.
Here you can find some information about multiple regression in excel.
Results of the regression:
The return on NYSE:NEM was significantly more volatile than changes in the price of gold (London bullion market) over 2015. The price of gold was the only statistically significant variable in explaining the return on the gold stock.
The beta gold is 3.75, far above the historical gold stock industry (1.53).
What happened in 2015?
In another previous article that I wrote on NYSE:NEM, I made three event studies on the gold company's earnings announcements:
- "Newmont Announces Fourth Quarter and Full Year 2014 Operating and Financial Results and 2015 Outlook. Newmont Mining Corporation" (February 19, 2015 4:06 PM).
- "Newmont Announces First Quarter Operating and Financial Results" (Newmont Mining Corporation April 23, 2015, 4:01 PM).
- "Newmont Announces Third Quarter Operating and Financial Results" (Newmont Mining Corporation October 28, 2015 4:01 PM).
Summary of the results of the three event studies:
First event study: the "Good News" (70.00% surprise), the abnormal return of the event day didn't have any statistical significance. But on March 6, 2015, the negative abnormal return for NEM was due to a tumble in gold prices.
Second event study: the "Good News" (100.00% surprise), the abnormal return of the event day didn't have any statistical significance. On April 24, 2015, a day after the event, the abnormal return is 0.0662 (6.62%). The "good news" had an impact on the value of the stock due to quarter results that surpassed Wall Street expectations.
Third event study: the good news (35.3% surprise) didn't have any impact on the value of the stock. But on November 5, 2015, six days after the event, the abnormal return is -0.0776 (-7.76%), with an AR t-test of -2.765 (less than -1.96):
"As of November 5, 2015, Newmont Mining Corporation's stock price showed declines of 9% YTD (year-to-date) on an absolute basis. However, on a relative basis, the company outperformed its peers in the gold sector. The Market Vectors Gold Miners ETF (NYSEARCA:GDX), meanwhile, fell by 26% during the same period while the SPDR Gold Shares (NYSEARCA:GLD), which tracks the spot price of gold, fell by 7.3%."(here).
AR t-test means "abnormal return t-test. The abnormal return is the difference between actual returns and expected returns on the gold stock according to a regression function. The AR t-test tells us if an abnormal return is statistically significant (www.eventstudytools.com/significance-tests).
What I learn from these three event studies:
Beta gold of +3.75 means that the gold stock moved in the same direction of the gold price, either when gold tumbled and when gold price surged.
When gold price tumbled, NYSE:NEM outperforms its peers in the gold sector, and the indexes: the Market Vectors Gold Miners ETF and the SPDR Gold Shares , which tracks the spot price of gold.
The earnings surprise, that is the difference between analysts' estimates on EPS and actual EPS, was huge (at least 100%).
VALUATION
What will help to better guess if it is time to sell this gold stock and make capital gains or wait for further appreciations in the share price of a stock that is gaining momentum is try to answer the question whether or not the gold stock is creating value.
One of the three primary commitments of NYSE:NEM is the creation of value.
My approach to assess the gold stock is based on the following argument that supports the inclusion of precious metal mining stocks in an investment portfolio.
Unlike gold bullion, mining stocks produce economic value by profiting from the extraction and processing of metals. Shareholders receive this value through the distribution of profits via dividends (here).
First I will estimate the cost of capital of NYSE:NEM and then the growth rate. I need these two items to assess the intrinsic value of the gold stock by discounting the dividend.
The gold company pays $0.10 dividend per share to its shareholders, therefore what is a better way than DDM to determine the intrinsic value of a gold mining stock that pays a dividend to its shareholders?
Betagold = [1.24 x (131/143) + 3.75 x (12/143)] = 1.45
Betamkt = [0.14 x (131/143) + 0.85 x (12/143)] = 0.20
The average annual return on the market and gold are respectively 5.51% and 10.24% over the period February 2004 to January 2016.
Rnem = [1.45 x (10.24%) + 0.20 x (5.51%)] x 100 = 15.95%.
Newmont Mining Corp. total equity and debt as of December 31, 2015 (amounts are in millions of USD):
- Total Equity: $7,178.00
- Total Debt: $9,968.00
- Total value of the firm's financing (equity and debt): $17,146.00
- Percentage of financing that is equity: 42%
- Percentage of financing that is debt: 58%.
- Interest expense: $325.00
- Income (loss) before income and mining tax: $966.00
- Income After Tax: $322.00
- Income and mining tax expense was $644 for 2015, resulting in an effective tax rate of 66%.
- The latest three-year average tax rate is 37.67%.
- Return on Equity (NYSE:TTM): 2.02%.
- Payout Ratio: 26.32%.
Cost of Capital of NEM: [42% x 15.95% + 58% x 3.26% x (1 - 0.3767)] = 7.88%.
Analysts' estimate on Next 5 Years (per annum) growth rate is negative for Newmont:
I calculate the growth rate, g, as ROE x RR (retaining rate): 2.02% x 74% = 1.5%.
I can estimate I.V. for Newmont Mining Corporation:
I.V. = $1.57 vs. a current share price of $24.83 (February 21, 2016). An assessment that is based on the last financial results released by the company.
My point of view:
The gold mining stock is overvalued by the stock market and according to my point of view it is not a buy for a long position. It is not an appropriate investment for a value investor who buys stocks which market price is less than 30% (margin of safety) of their intrinsic value and benefit from a stream of dividend paid by the company over the time. Gold stocks are super cyclical stocks.
Another way to see the creation of value for the shareholder is the appreciation of the gold stock in the market as the gold price increases since Newmont's business model is directly dependent upon movement in the gold prices. However I don't think that this gold stock is the best in the gold stock industry for a long position either, for three reasons:
- Historically NYSE:NEM showed to be more volatile than gold, but it is below gold stock industry average and less volatile than other gold stocks and gold indexes
- I perceive from other gold mining stocks that 2016 gold will not substantially increase as widely expected. I got this insight from other mining companies (read here, here, here and here).
- Other gold stocks have surged more than NYSE:NEM over the last month:
4. Many holds on this stock: out of 22 analysts only 7 rate NYSE:NEM as a buy last month.
For short position: it may be an interesting opportunity if there are really significant and substantial jumps and dips in the price of the precious metal during 2016.
But analysts' estimates on EPS also play an important role here. I like to follow analysts' estimates on EPS as well as the development in the mining operations of the company.
EPS and revenue estimates for March 2016 are now as follows:
Mean Recommendation (this week) is 2.5 and the mean target price is $25.12.
High target price is $38.00 and low target price is $18.00.
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.