Today North America kicks off the Christmas season with the annual Black Friday sale. Many stores are offering discounts of up to 70%; no wonder this is the biggest shopping day of the year. The stock market is also having a “sale” with many resource names discounted 30-70% over the past couple months. You can check out any exciting opportunities at Stocktrades.ca.
So how do we take advantage of the current market sale?
First of all, in order to make money in the stock market you need to buy low and sell high. Investors with cash on the sidelines should see this as an excellent buying opportunity. Many big name investors have gone on the record as saying gold mining companies are at the cheapest valuations ever!
To put it into perspective, buying stocks at these levels is like shopping for a new car and being offered 50% off by the dealer when it’s time to pay. Not many people would pass up that kind of opportunity and it should be the same with investing in the stock market.
Not all stocks will appreciate in value; in fact many junior mining companies will continue to struggle to survive. So investors should be extremely selective. Find the top quality names that are doing well at current commodity prices and that will thrive if/when the bull market returns. And remember: the commodities business is cyclical and always has been.
Oil stocks have been hammered recently as OPEC announced yesterday that they will not be cutting production triggering the price of oil to drop below $70 a barrel. Mining companies are struggling to make a profit with higher input costs and declining grades.
A few tips on selecting resource stocks:
1. Management – It is critical to invest in high quality management teams with proven track records. I was reminded in a meeting yesterday of the Pareto principle (also known as the 80-20 rule) where 20% of the people generate 80% of the wealth. You want to invest in companies’ management teams that have a proven track record. Also check Sedi.ca for insider share positions; you want to see significant skin in the game. Names that come to mind that have done this in mining are Ross Beatty, Frank Giustra, and the Lundin Family.
2. Balance Sheet – Take a good hard look at the balance sheet. It is critical to know how much cash a company currently has and if they have any debt (and if they do, when it comes due). Remember that balance sheets are usually a couple months old so factor the approximate current burn rate into your evaluation.
3. Producing Companies – Mining investors need to be aware of what it actually costs the company to mine an ounce of gold and then stress test this at various gold prices. Oil investors will be looking at netbacks and stress testing at various oil prices. One thing to note is that oil companies tend to hedge production so even with the current sell-off some companies might still be very profitable.
4. Get Professional Help – Everything in the resource market moves quickly and it’s time consuming to follow the sector closely enough to understand what’s going on. At Resource Opportunities we have 6 sets of eyes that spend countless hours every day following the market looking for the next big winner.
In the December issue of Resource Opportunities we will be sharing our tax loss favourites and our top names to buy.
As painful as it might be out there I am excited for December as I recognize the opportunity to buy high quality stocks on sale.
I encourage you to join us at Resource Opportunities.
Thanks and have a great weekend!