I try to keep a balanced portfolio, or at least one that isn't entirely concentrated in one sector.
I like a lot of international holdings, especially from East Asia (but not particularly China itself) and I try to have at least some representation even in sectors that bore me utterly, like consumer packaged goods - Procter & Gamble (NYSE: PG). I know you've increased your dividend every year since 1954, which is a magnificent achievement, but I STILL can't get excited about your business!
Some market sectors I have difficulty warming up to. Tech, for example, I find very difficult to analyze. If a company has the latest whizz-bang, I can't tell how the market will receive it. I can't tell how long market enthusiasm for it will last, and I can't tell how quickly competitors will produce something that's just a little bit better.
Even an Apple (Nasdaq: AAPL) that appears to have an invulnerable position can very easily be undone by margin erosion. Apple's margins are unsustainable in a competitive environment; it has a business in which Foxconn, the manufacturer, makes very little money while Apple, the retailer, makes heaps of it. For me, instead of trading at a premium to the market because of its growth, tech should trade at a discount to the market because of its risks.
My Top PickMy favorite sector is currently as unloved as tech is loved. Its operations are pretty simple, with a fair amount of heavy machinery but not much fancy technology involved.
As an outside investor, you can determine fairly quickly which managements are ripping off their investors, and which are providing value.
Like the pharmaceutical sector, there's a fair amount of political risk involved, especially when conditions favor the sector and returns are high. However it's uniquely attuned to the global mix of misguided fiscal and monetary policies, and if they continue or are intensified these stocks will almost certainly swing from being very undervalued to hopelessly overvalued - to the enormous profit of its faithful investors.
I'm talking about the precious metals mining sector.
Still Risky BusinessSince its peak in September 2011, the precious metals mining sector has suffered badly, worse than the metals themselves.
The Market Vectors Gold Miners ETF (NYSE: GDX) is down 55% from its September 2011 high, while the price of gold is down only about 24%. Silver has suffered worse than gold. The iShares Silver Trust (NYSE: SLV) is trading at half its peak in May 2011, while silver miners are generally down more than gold miners.
Part of this is the effect of lower mineral prices on the mining companies' operations; high cost miners like IAMGOLD (NYSE: IAG) have production costs that are close to the current reduced gold price.
But there is also the effect of political risk for companies like Silver Standard Resources (Nasdaq: SSRI), which has been forced by the Argentine government to repatriate the dollar proceeds of its sales to Argentina, where the central bank can scoop off the difference between the official peso/dollar exchange rate and the free market rate. SSRI's top management is of course paid in Canadian dollars, not pesos, since its HQ is in Vancouver.
There is also the effect of strikes, such as the one shutting down Freeport McMoRan's (NYSE:FCX) largest copper and gold mine in Indonesia for four months last year.
And finally there has been a huge cost inflation in mining and mining-related construction, so much that Thompson Creek Minerals' Mount Milligan gold and copper mine, while still apparently on target for opening in September, has suffered a cost escalation of almost three times, from $550 million to $1.5 billion.
What Makes It Worth ItSo why invest in this risk-bloated sector, you ask?
Well, unlike the future trends in tech sector gadgetry, the risks in mining can be assessed by an intelligent outside investor, and you can pick mines where risks are contained.
You also can find mines whose production is increasing rather than decreasing, which are not subject to major political risks, and whose cash flow is well protected from the effects of any sudden dip in precious metals prices.
But the main reason for investing here is that with Ben Bernanke and his international brethren keeping interest rates far below the level of inflation, and adding extra "quantitative easing" at any opportunity, the current fiat-money currencies have nowhere to go but down. In those circumstances, gold, and to a lesser extent silver, have nowhere to go but up.
My Top 5 PicksTo avoid having to choose, you can always invest in GDX, which averages out the risks of each individual stock and is due for a rebound as precious metals prices recover. At its current price of $29 it's on an 11 times historic P/E ratio, and should rise on a leveraged basis with the gold price.
A second possibility is to buy a precious metal ETF, but for platinum (NYSE: PPLT) or palladium (NYSE: PALL). These metals move in line with gold, but their supply is much more constrained, coming primarily from South Africa and Russia. However, there is a natural use for them, expanding with the automobile industry's roll-out in emerging markets (in automobile catalytic converters). Hence these metals are likely to outperform gold, and can act as a useful partial hedge to your direct mining holdings.
Finally, I will suggest two miners themselves. One is Endeavour Silver (NYSE:EXK). Endeavour is a silver miner with three mining properties in Mexico (a pretty safe political risk, since it's in NAFTA).
Its production is expanding rapidly, up 39% on the first quarter of 2012, as are its earnings, so although it's on a trailing P/E of 11.9, its prospective forward P/E for the year to December 2014 is only 5.9. Needless to say, with expanding production and reserves, EXK would do particularly well if the silver price ramped up.
Of the gold miners, I like FCX which is a major international miner of copper and gold. FCX is currently trading on a 9.7 historic P/E ratio and only a 6.8 times prospective P/E ratio. Notably, it appears to have settled its dispute with its Indonesian workforce, and remains a low-cost competitor with a diversified portfolio.
Related Story Links:
- Money Morning:
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The Eurozone Hangs On By a Whisker - Money Morning:
My Two Favorite Gold Mining Stocks
