As we
alluded to last week, there is an overflowing amount of evidence that both
the metals and the shares have bottomed. Price action, sentiment indicators
and fundamentals more than confirm a market bottom. Does this mean the market
is ready to zoom much higher? Not necessarily. The sector must contend with
some overhead supply as well as repair technical damage that caused a loss of
both short and long-term momentum. Once the market forms higher highs and
higher lows then its momentum can start to build. Until then, investors have
some time to figure out which companies could be the big winners of the next
cycle.
By now, speculators and
investors should have learned some lessons about investing in this sector.
After three cyclical bulls and three cyclical bears, the cyclicality of this
industry should be more than obvious. Most mining shares are not permanent
buy and holds. Juniors or non-producers cannot sustain gains over the
long-term and ultimately retrace the vast majority of their gains during the
next cyclical bear. Even producers struggle to maintain gains beyond the current
cycle.
Furthermore, it is true that
the mining stocks have badly underperformed the metals. Yet, for anyone who
has followed history this is not news nor surprising. As Steve Saville shows here,
the mining stocks consistently underperformed Gold during the last bull
market. You can throw out your XAU/Gold or HUI/Gold charts as buy signals
because history tells us further lows could be ahead even as the bull market
continues. I wonder if the conspiracy brigade thinks there was nefarious
shorting of the miners in the 1970s.
The reality is two-fold:
mining stocks as a group are notoriously unreliable even in a bull market yet
many individual companies are capable of spectacular gains every cycle. This
is exactly why stock picking is extremely important to success in this
sector. In reviewing our own personal performance and performance for
subscribers, we find that stock picking is far more important than market
timing. Market timing should be used to find low risk and high risk points
for your favorite stocks. The bulk of your time should be spent identifying
those stocks.
Here is an example of how
stock picking can make a big difference in your portfolio. Below is
performance chart of six silver stocks and their performance over the past
four years. These are brand name, well known silver stocks. We are not
talking about obscure juniors. See how important it is to be in the leading
stocks?
In the past year, those who
owned Franco Nevada and Royal Gold are much happier than those who owned
Agnico Eagle and Kinross. These are just two of numerous examples.
Pros like Rick Rule and Brent
Cook often remark how too many investors load up their portfolios with too
many companies and then have no idea why they bought them and why they still
hold them.
Ok Jordan, so how do we find
the big winners?
First, you need to define your
goals and develop a philosophy to achieve those goals. Are you looking for
income, growth or speculation? Realize that producers and non-producers are
quite different. Non-producing companies are not going to provide you income
or growth. They are a tool for speculation. We should know by now that large
producers struggle to provide leverage even in a favorable environment. We
prefer smaller, growth-oriented producers that have the ability to become
mid-tier or larger producers. When it comes to juniors, we prefer management
teams with a track record and companies with a strong capital structure.
Lastly, buy on the cheap. Even in a rip-roaring market, the sector will have
several 25% corrections per year. This is where patience is important.
As we confirm the start of the
next cyclical bull, hopefully we've learned some lessons. This is a tough,
bad business and even so in the best of times. Yet, the rewards are immense
for those who are able to separate the wheat from the chaff. The good news is
right now the wheat isn't much more expensive than the chaff. Therein lies
your opportunity. Ignore the pessimists and those who say mining stocks are
manipulated. They just lack the attitude or skills to find the big winners.
Good Luck!
If you'd be interested in
professional guidance, then we invite you to learn more about our premium service in which we focus
on the producers and explorers best positioned for and most likely to take
advantage of the next leg up in this bull market.
