Three Gold Picks for the Value-Minded

 | Jun 01, 2012 | 2:00 PM EDT
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A May 28 headline in The Wall Street Journal read, "Gold Poised to Regain Safe-Haven Status." A May 30 headline on read, "Comex Gold Ends Higher on Fresh Safe-Haven Buying Interest." It turns out that onetime presidential candidate Newt Gingrich is something of a gold bug. While running for president in February, he promised to appoint a gold commission to study the role of gold in our monetary system, perhaps with the idea of returning to the gold standard. He seemed afraid that the country was printing money unimpeded.

As some have noted, fear is gold's best friend. Fear has been driven by the recent $24 billion bailout of Bankia, one of Spain's largest banks, concerns about Greece defaulting on its debts and leaving the euro zone, worries about government deficits in the U.S. and other countries, indications that the economies of China and India are slowing, and a general feeling that the world economy is not quite healthy.

All this, while it bodes ill for many people and countries, bodes well for gold and for companies that are in the gold business. If you want to add this precious metal to your investment portfolio without spending an unconscionable amount on gold jewelry at Tiffany, consider Yamana Gold (AUY). Yamana is a Canada-based mining company that primarily produces gold. It has mining operations and land positions in Brazil, Chile, Argentina, Mexico and Colombia.

To recommend stocks, I rely on strategies I created that are modeled after the strategies of some of history's greatest investors. One of these is my Peter Lynch-based strategy, which gives high ratings to several gold stocks at this time, including Yamana.

The strategy's most important variable is the price-to-earnings ratio relative to growth, or P/E/G ratio. It's a measure of how much the investor is paying for growth. To be acceptable, the P/E/G cannot exceed 1.0, which is the point where the investor is paying $1 for every percentage point of growth. Yamana's P/E/G is a perfectly acceptable 0.85, on the basis of a P/E ratio of 19.10 and a growth rate of 22.53%, using the average of the three-year and four-year historical EPS growth rates. Also in Yamana's favor is its low level of debt.

Goldcorp (GG) is another Lynch favorite. It has operations in North and South America including the U.S. and Canada. Like Yamana, Goldcorp is based in Canada. The company's P/E/G is a very strong 0.58, based on a P/E of 19.19 and a growth rate of 33.33%, which is derived from an average of the three- and four-year historical EPS growth rates. In addition, it has an exceptionally low level of debt.

Barrick Gold (ABX) is the world's largest gold producer, and it has operations in North and South America, Africa, Asia and Australia. In addition to holding gold reserves, this Canadian company has sizable copper and silver reserves. Barrick has an extremely desirable P/E/G of 0.20, based on a P/E of 8.64 and a growth rate of 42.87%, which comes from averaging its three-, four- and five-year historical growth rates. Unlike Yamana and Goldcorp, Barrick has a sizable though not too large amount of debt.

If you have a bit of the gold bug, any of these companies are solid bets. They are solid performers with well-priced stocks.



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