Silver Stocks Best Investment YTD. Can They Continue To Outperform?

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Includes: AG, CDE, CMCO, EXK, FSM, HL, PAAS, SSRI, TAHO, WPM
by: Lawrence Williams

Summary

Most top silver mining stocks have seen gains of well over 100% so far this year, even outperforming gold as a subsector.

Has silver stock performance been too far too fast or is there life in them yet in a rising precious metals price scenario.

Gold:Silver Ratio has been coming down sharply in the past few days which could bode well for the metal's continuing strong performance vis-a-vis gold.

It seems to have gone unnoticed by most of the media, but in Tuesday trading, and overnight, the silver price at last made a significant move upwards breaching the $18 an ounce level for the first time in a year and a half. While silver had made some gains alongside the rising gold price, its performance this year, up until now, had been somewhat underwhelming given that it is usually reckoned that in a rising gold price scenario, silver usually substantially outperforms its more valuable yellow sibling. It actually has done better than gold in coming down from a Gold:Silver Ratio (GSR) of around 83 at the beginning of the year, but most of that fall was in early April, since when it had largely been underperforming gold.

Even so, North American silver equities have been among the year's best market performers and if gold and silver continue to perform positively we could see some good further gains ahead. We recommended Hecla Mining (NYSE:HL) back at end-December when its price was $1.93. After a brief stutter early January, the stock was trading at $4.94 at the time of writing. A massive 156% gain. But some other silver stocks have performed even better. Over the same period Coeur Mining (NYSE:CDE), something of a recovery stock, rose from $2.48 to $10.32 - up 316%. Both Coeur and Hecla rank among the world's Top 20 silver miners - Nos. 12 and 19 in the world rankings respectively, but both produce significant amounts of gold too. The world No. 6 silver miner, Pan American Silver (NASDAQ:PAAS) has risen 141.5% year to date, while relatively new Guatemalan silver (and gold) miner, Tahoe Resources (TAHO), the World's No. 10 silver miner (and a significant gold producer) has risen in price by 72% year to date. For a listing of the world's top silver mining companies and countries see: Top World Silver Producers - Countries, Companies and Mines.

While the above are the biggest of North American quoted silver stocks in terms of production, there are a number of others which have performed equally as well. Most are Toronto-quoted, but Endeavour Silver, First Majestic Silver and Fortuna Mining also have secondary U.S. quotes. Endeavour (NYSE:EXK) is up 175% year to date, First Majestic (NYSE:AG) 170% up, and Fortuna (NYSE:FSM) up 187%.

Canadian broker Raymond James has just published some research and recommendations on all of the above - apart from Hecla which seems to have been left out, but maybe they just classify it nowadays as a gold producer despite it being classified as one of the world's top silver stocks! The analysis also ignored Silver Standard (NASDAQ:SSRI) which has risen 142% year to date. It could be that these particular stocks are currently not covered by Raymond James analysts. The broker warns, though, that in this sector one should tread particularly carefully, it being important to look at stocks where the downside is perhaps less limited should the silver price fall back.

There is also a warning that the silver stock prices covered are perhaps running at a premium to Net Asset Value, although they see this as justified for their top picks, TAHO and FSM. They also highlight PAAS and CDE as having long life mines and improving economics, and MAG Silver (NYSEMKT:MAG) in the developer space with its investment in what it describes as the world's best undeveloped silver asset in Juanicipio in Mexico. MAG holds 44%, while the majority holder is LSE quoted Fresnillo. MAG is up 58% so far this year while Fresnillo FRES on the LSE - is up 128% and is one of the resource stocks in the FTSE 100 which has helped mitigate the Index's post Brexit fall.

Silver stocks have thus had a very good run so far and have probably been the best investment asset class so far this year, even beating gold stocks. With the GSR coming down - it has even fallen a little further today - 72.14 at the time of writing - silver investors may be feeling particularly confident but, as Raymond James warns perhaps they have been outperforming more than justified. But of course should the gold price continue to rise, and silver do even better in percentage terms, such worries will not be justified.

To Raymond James' top picks of TAHO and FSM, as income and growth stocks respectively, we would probably add HL as having additional financial strength and also, like TAHO, a dividend payer. To these we would add streaming company, Silver Wheaton (SLW), up 32% year to date, as providing a safer investment option the investment returns may not be a good in a rising silver and gold price scenario, but the downside is far more limited should gold and silver stutter.

At the moment, silver seems to be on a belated roll, but we reiterate the downside vulnerabilities should precious metals prices fall again. As a smaller market than gold silver is also perhaps more prone to big money take-downs on the paper futures market should it rise faster than some vested interests may like to see. But investment demand for the metal has been particularly strong of late. Some see it as potentially heading into short supply for physical metal, but this could be wishful thinking on the part of the silver bulls - there's an awful lot of potentially available metal out there should investors wish to take profits - but it is perhaps significant that in terms of new mined supply against global demand silver is almost certainly heading for a deficit.

Thus silver, and silver stocks both have a tendency to be particularly volatile and fingers are easily badly burnt on any downturn, But if one is convinced gold and silver will continue to move up, and the GSR to fall, silver stocks could continue to be a great investment this year and forwards. But probably not for the proverbial widows and orphans!

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.