In early October among the Randgold merger hype, I wrote on Barrick Gold (GOLD) and discussed taking profits on the stock above the $13.00 level. My thesis was that the stock was likely to need a pullback before heading higher, and that is exactly what the stock has done. The good news for the bulls is that this consolidation has allowed some of the stock's key moving averages to play catch-up, and the stock is now sporting a much more attractive looking base. While the earnings trend for the stock has still not started a new uptrend, the stock is looking like it has finally bottomed and a new uptrend may be in store. Often the fundamentals for a stock's move do not become evident until the movement has already started, but the technicals will tell an investor all they need to know ahead of time. I believe the $13.85 level to be a critical level for the stock going forward, and a move above higher on a weekly close would be a bullish development.
I often hear about how technicals are voodoo and are of no help to investors, but I've found technicals to be enormously helpful in preparing for the more significant moves in stocks. Over the past year, we've seen the collapse of Newell Brands (NWL) from $35.00 to near $15.00 a share and considerable dents in the portfolios of value investors that tried to outsmart the market. No one could predict when Newell Brands fell below its key moving average (pink line) below that its annual earnings per share would plummet from $2.89 in 2016 to $1.47 in 2020 after several consecutive years of growth, but the technicals suggested something smelled off and warned investors to get out. There are countless examples of this including the precipitous drop we've seen in Guyana Goldfields (OTCPK:GUYFF) whose all-in sustaining cash costs came in at nearly double what initially projected, sending the stock down 90% from its 2016 highs. No one in 2017 knew their mine would be a colossal disappointment, but the market smelled something fishy, and the stock sold off accordingly. The point of this is that we often don't know the reason or fundamentals until a good portion of a stock's move has already been realized. For this reason, I believe it is important to weigh both the fundamentals and the technicals but to let the technicals be the canary in the coal mine as the fundamentals will typically lag.
So how is any of this relevant to Barrick Gold? Let's dig in and take a look.
Taking a look at Barrick Gold's earnings trend below, we can see that the company's earnings trend has been more or less flat-lining since 2014. Also, full-year 2018 earnings per share [EPS] were a definite disappointment with a 50% year-over-year drop from the $0.75 posted in FY-2017. On the surface, there is nothing to be pleased with here as investors want to hold companies where earnings are growing. 2018 is old news, and the market is a discounting mechanism which is continually looking 12-18 months into the future. By doing this, we can see that if Barrick Gold can execute, there's a reason to believe the worst is behind the company in terms of its earnings trend, and things might be looking up going forward. Why is this? Because FY-2019 and FY-2020 estimates are for $0.40 and $0.47 which would represent two consecutive years of roughly 15% growth. While there is no confirmation of this improvement yet as these are estimates, analysts are beginning to see the light at the end of the tunnel for what has been a bleak earnings trend for the company.
The first chart I have displayed below was a look at Barrick's earnings trend from 2011 through 2019, and the one below it (green line) is the newer estimates showing FY-2020 as well. As we can see, there is a slight improvement with two consecutive years of earnings growth looking forward.
Based on the above earnings trend, there is nothing to get excited about from a growth standpoint. While annual EPS are expected to grow by 15% on average over the next two years based on estimates, the company's annual earnings per share are still well below FY-2016 and FY-2017 levels. It is a positive that earnings are at least flat-lining now and seem to have found a bottom, but from a growth standpoint, there are much more exciting names out there like Atlantic Gold (OTCPK:SPVEF), Kirkland Lake Gold (KL).
So if there is little to be excited out fundamentally with Barrick Gold, then why is the stock up nearly 60% off of its lows and giving up absolutely none of those gains? I believe this is because the sentiment is finally improving on the stock, and technical analysis is merely the collective behavior and emotion of all market participants displayed in a measurable form. My point in all of this is that while there are no obvious fundamental reasons for Barrick to go higher from here, I would side with the technicals even if there is no underlying justification for a move higher that is present. This is because just as the technicals will act as a canary in the coal mine ahead of adverse developments, they will act as the first signs of life in a desert wasteland when things are improving.
(Source: Chile Estuyo, Instagram.com)
As investors likely remember, Barrick Gold staged a 60% rally in Q1 2017, but immediately gave up all of that ground within eight months. This time around, the stock has rallied the same amount but has given up almost none of that ground so far. Thus far, this is an evident change of character that is worth monitoring as it suggests we may be seeing the beginnings of a trend change in the stock.
As we can see from the below chart of Barrick Gold I shared in my previous article, I use a monthly moving average as a barometer of whether the stock is worth considering for purchases at low-risk buy points, or worth avoiding. For the period between 2012 until early 2016, the stock was in the red shaded "avoid" area. It briefly went into the buy zone (green shaded area) in early 2016 until mid-2017, and then fell back into the avoid zone for another year and a half starting in Q3 2017.
As of last month, the stock is back in the green shaded area for its first month, and the key for the bulls is defending the $13.00 level on a monthly close to keep it in this area. This does not mean I am immediately buying the stock; it just means that it has now transitioned into a position where it is buyable if the proper setup arises. This is a definite positive development for the bulls but relies on them playing defense near $13.00 on a monthly closing basis.
Moving to a weekly chart of the stock, we can also see that the stock has climbed back above its 40-week moving average (pink line), and has a clear line of least resistance established near the $13.75 level. If the stock were to break out over this area and put in a weekly close above $13.85 on above-average volume, this would be a positive development for the stock.
Based on the above improvements in both the weekly and monthly charts, there's a reason to believe that Barrick's trend is finally changing, and the stock may finally be seeing blue skies ahead. This trend change is reliant upon the stock defending $12.30 on a weekly close, and the stock breaking out above $13.85 on a weekly close. The current technical picture for Barrick has improved immensely, but the bulls aren't out of the woods until $13.85 is reclaimed on a weekly close. I continue to watch the stock for signs that the stock has established a new uptrend, but we aren't there just yet.
While there's no obvious reason that Barrick is outperforming quite a few of its mid-tier peers the past couple of months, the fact that it is is all that investors need to know. Based on the structure of Barrick's weekly chart, it's suggesting that the market knows something we don't and that is worth paying attention. I currently have no position in the stock but would consider a new position if a new uptrend can be confirmed. This would require a weekly close above the $13.85 level.
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.