The precious metals mining industry looks more attractive than the overall stock market if central bank liquidity continues to be abundant.
Interesting value opportunities can be found in the oil and oil service industries.
Uranium offers fantastic value, but when the turnaround happens is less certain.
This is an article about my positioning for 2020 and some general reasoning behind it. My portfolio is concentrated to a few specific industries; precious metals, oil, and uranium. The article will not cover the various stocks in great details but rather how I reason regarding the industry allocation.
General Market & Precious Metals Mining
The overall market has performed better that I imagined recently. This is very likely due to the dovish turn from the Fed and more liquidity, rather than increasing earnings.
Figure 1 - Source: Zerohedge
While there are certainly some concerning signs for the overall economy, real estate prices continue to tick up which is one of my favourite economic indicators. We are also seeing leading indicators like housing starts and building permits now looking strong, which suggest lower rates and increased liquidity is impacting the economy in a positive way.
Figure 2 - Source: FRED
Having said that, valuations are still high for the general stock market.
Figure 3 - Source: multpl.com
My view is that the amount of liquidity that is required, to keep the market climbing, will be substantial. Which could lead the Fed's balance sheet reaching all-time highs relatively early in 2020. The Fed is unlikely to stop there and the balance sheet could reach $5T by the end of 2020.
Figure 4 - Source: FRED
If that happens, the equity market could do quite well, but the precious metals mining industry will likely benefit even more, which is why I have a very significant allocation to the industry. Gold specifically will be supported by central bank buying and likely more general interest from the public.
Figure 5 - Source: Daniel Lacalle on Twitter
I consequently view precious metals mining companies more attractive than the general market. The precious metals industry have a lower valuation and I believe it to be a bigger beneficiary from the Fed expanding the balance sheet.
Oil and Oil Service Companies
I am relatively agnostic to the oil market in the short-term, but believe it offers great upside potential in the medium term from lack of global exploration and the fact that many marginal shale oil producers are not profitable at the current oil price. My bearish medium term outlook for the dollar plays a part as well.
Figure 6 - Source: Art Berman on Twitter
I prefer to allocate my money in the industry to low cost producers like Tethys Oil, listed in Sweden but operates in Oman. The company trades at a single digit P/E, pays a dividend yield of 9.5% based on 2019 data. 2020 dividend yield could be slightly lower as the company has some interesting growth projects it will allocate cash towards.
Figure 7 - Source: Tethys Oil Quarterly Reports
Standard Drilling is an investment company focused on Platform Supply Vessels. The company trades at an attractive discount to book value and looks to be liquidating their positions based on recent transactions. The company has extremely low costs and have historically allocated the money to shareholders, last time the company liquidated in 2012-2013.
Figure 8 - Source: Standard Drilling Quarterly Reports
I have discussed my uranium investments in many articles before and Cameco at least is seeing positive sings, which could point towards a recovery. The decision from the uranium working group will soon be known as well. That decision is likely keeping the industry stuck in a holding pattern.
Cameco and Yellow Cake are my largest positions in the industry, but I am also invested in NexGen Energy and Uranium Fuels. The latter investments should be viewed as more speculative and the former are better options for the risk-adverse investor.
- There is still value in the precious metals mining industry and the industry will likely benefit from further balance sheet expansions and buying from central banks.
- Attractive bargains can be found in the oil industry, but the outlook for 2020 is less certain as it will depend on the overall economy as well.
- Uranium has been in a very long bear market which offers fantastic value. The turnaround can be more violent than most expect but be prepared that the depressed market can continue for some time.
Disclosure: I am/we are long THYOF, SDSDF, CCJ, NXE, UUUU, YLLXF. 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: I am long the stocks mentioned in this article.