B&P Briefing: Put This Gold Stock on Your “Watch List”

February 23, 2015 *** Stocks in Europe are in the green, following news that Greece reached a tentative deal with its creditors to extend its bailout agreement. This follows three straight weeks of gains for euro-zone stocks. *** There are plenty of positives in Europe’s favor right now. Last year, the euro fell 12% versus the dollar. This makes euro exports more competitive relative to US exports. And the European Central Bank has said it will inject €1 trillion into the euro-zone financial system by next September, which as we now know boosts stock prices (at least over the short term). Also, sovereign bond yields are on the floor. The 10-year US Treasury note yields 2.1%. And the 10-year German Bund yields just 0.3%. There’s a lot of folks out there starved of yield. And right now, you can pick up a 3.6% dividend yield on the SPDR EURO STOXX 50 ETF (NYSE:FEZ) – which tracks 50 blue-chip euro-zone stocks – versus just 1.9% on the S&P 500. *** Valuations are attractive in Europe too. If you look at the forward price-to-earnings (P/E) ratio – like a lot of big money managers do – the S&P 500 is trading at 17 times analysts’ estimates of earnings of the next 12 months – or about 15% above its 30-year average. Advertisement $8,377 Monthly “Profit Paycheck” For the past year, the Money Morning team has been working with one of the world’s most successful money managers on perfecting a way you can make thousands of extra dollars each month. This is CASH straight from the market, and has nothing to do with options, dividends, annuities, bonds, or futures. Now you could be one of the first to collect these paychecks… starting in 24 hours. By contrast, the euro-zone stock market trades at just under 14 times forward earnings – in line with its 30-year average. *** Of course, for value-minded investors, a Greek exit from the euro would be a fantastic opportunity to snap up quality assets at fire-sale prices... This is what Bill did in Argentina in 2005, following the country’s currency crisis. As Bill told Diary readers last Tuesday, he bought a mountain ranch in northwestern Argentina “for a song.” To find out if there was a similar setup in the cards for Greece, I reached out to Bill’s overseas real estate scout, Ronan McMahon. If you don’t know him already, Ronan works closely with Bill’s top-tier family wealth advisory, Bonner & Partners Family Office. He also edits the overseas real estate advisory Real Estate Trend Alert. *** Ronan reckons Argentina is the “playbook” for real estate deals in Greece: The situation in Greece at the moment is bleak. The economy is a mess and debt and unemployment levels are unsustainable. They have just elected a government that promises to rip up arrangements with their financiers. Greece leaving the euro is back in the cards – that’s why we need to watch carefully how this plays out. If that happened, the likely scenario would see bank accounts being frozen, capital controls introduced, and the Greek government would print their own currency (the value of which would drop like a rock on the first day of trading). We have a playbook for this, though. Just think of what occurred in Argentina more than a decade ago. Folks bought real estate of great intrinsic value (historic apartments in Buenos Aires) at big discounts. If the new government’s fragile arrangements with the Troika (the three international organizations representing the bailout creditors) unravel, it could herald a Greek exit from the euro and an Argentina scenario. This is a market to watch. And if things unravel, the play will be to buy intrinsic value really cheap. Buy the nicest villas on the nicest islands. *** As I told Diary of a Rogue Economist readers, I don’t believe a “Grexit” is imminent. But anything could happen. And Greece still poses a major risk when the next meeting with its creditors rolls around. So, it’s no wonder there’s been a surge in demand for physical gold this year. Reports British newspaper the Sunday Telegraph: BullionByPost has seen the highest demand for gold bullion in its six-year history, an exclusive report for the Sunday Telegraph can reveal. The precious metal dealer, which sold £96 million worth of coins and bars last year, said demand during the first five weeks of the year was up 40%, when compared to the same period a year earlier. Demand for 1kg gold bars, worth an estimated £26,000 each, has increased by 74% when compared to 2014. “The beginning of this year has been very busy; we have noticed more interest in gold compared to last year, particularly from small and medium investors,” said gold bullion dealer Chard. “If Greece does default or indeed, leave the euro zone, we would not be surprised to see a stampede of investors into gold,” Chard added. *** If that stampede materializes, it will be good news for Building Wealth readers who acted on editor Braden Copeland’s recommendation to buy shares of gold minerRandgold Resources (NASDAQ:GOLD). Randgold is already up 17% since Braden recommended it on November 28. And that’s with the gold price rising by just 2%. If the gold price takes off, even bigger gains are in store for Randgold shareholders. *** Remember, gold miners are leveraged plays on the price of gold. As gold stock investing expert John Doody of Gold Stock Analyst told me when I talked to him for my Investor Network advisory: Basically, when gold’s price goes up 1%... a gold stock typically goes up more than 1%. A rising gold price affects the price of a gold stock in two ways. It makes the current production of the company more valuable. Every ounce it produces is going to be worth a dollar more, in other words, without it having to do anything. Profits go up by the increase in gold price. Also, mines typically have 10 years or more ounces of future production in the ground. And those ounces in the ground are all now worth more, too. *** But Braden says Randgold’s fundamentals make it a highly conservative way to get exposure to gold… provided the gold price doesn’t collapse. (Leverage, after all, works both ways.) As he told Building Wealth readers, Randgold is one of the best-run miners in the world. And over the last decade, it’s been the best-performing stock in the Standard & Poor’s/TSX Global Gold Sector Index of 40 miners. *** But Randgold’s pedigree isn’t the only reason it’s Braden’s top gold miner recommendation. The company is carrying gold on its books for just $1,000 an ounce… which as you can see from the table below is lower than five of its major competitors. In fact, Randgold is the only gold mining company Braden found that is using an assumed gold price meaningfully below the current price of gold. *** As Braden explains: When you look at the assets on the company’s balance sheet, this is the price the company is using to compute the dollar amount of gold it owns (from reserves in the ground to finished, but unsold, production). Even when the price of gold was above $1,400 per ounce, even $1,700 per ounce, Randgold didn’t budge. It continued to list its gold on its books for $1,000 per ounce. This is a very conservative approach to accounting in the mining business. It helps insulate a miner from having to take the “impairment charges” on the income statement. Impairment charges are, just like the name implies, not good. They are an accounting entry required in order to adjust the over-inflated price of gold on a balance sheet (one an aggressive management team has built using higher prices... most of the time so it can borrow more money). *** In addition to this conservative approach to accounting, Randgold has a robust balance sheet. Braden: Randgold, with a market cap of $6.5 billion, now has a total of just $2.8 million in debt on its balance sheet (yes, “million”; that is not a typo). To compare, global mining behemoth Newmont Mining, with a market cap of $9.1 billion, is carrying $6.6 billion in long-term debt alone. And Randgold’s total liabilities are only $259 million ($140 million of that is accounts payable against $235 million in accounts receivable). Total assets (and remember, this accounts for a gold price of just $1,000 per ounce) are $3.5 billion. Randgold is trading above Braden’s “buy up to” price of $65 a share. So, if you didn’t catch his original recommendation, this is one for your “watch list.” If you already own Randgold, keep an eye on the gold price. If gold takes off… the company leverage to the gold price will really kick in. Regards, Chris Hunter February 23, 2015