Consider Digging for Gold and Other Treasures

 | Sep 22, 2011 | 10:00 AM EDT
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The Institute for Supply Management (ISM) recently published its August 2011 report, which found that, led by the mining industry, economic activity for 10 non-manufacturing industries increased. Another five industries contracted. According to the report, the non-manufacturing sector grew in August, making it the 21st consecutive month it has done so

Mining reported not just overall growth, but increases in new orders, new export orders and employment. The products of mining companies, such as copper and iron, have seen strong demand in recent years. The head of Rio Tinto's (RIO) iron ore operations was recently quoted as saying in MarketWatch, "World iron ore prices remain 'damn good' despite recent modest declines, and speculation about a rapid buildup in supply to the world market is overstated ..."

Mining companies, which have been out of favor for years, are now fairly hot commodities themselves, and you would do well to consider including mining stocks in your investment portfolio. Right now, the guru strategies I use to identify promising investments (these are computerized analyses based on the strategies of renowned investors) like three mining companies.

Vale S.A. (VALE) is the largest iron ore producer in the world and the second largest nickel producer. This Brazilian company operates in 38 countries, and produces a wide range of metal ores in addition to iron and nickel, including copper, alumina and manganese, as well as coal. I have a strategy I modeled on Peter Lynch's writings, and it uses the PEG ratio, which is the price-to-earnings ratio in respect to growth. This measures how much the investor pays for growth given the stock's current price. A PEG of 1.0 or less is acceptable and 0.5 or below is excellent. Vale is well into excellent territory with a PEG of 0.28, based on its P/E of 5.63 and its growth rate of 20.12%, which comes from averaging the three-, four- and five-year historical EPS growth rates. In addition, inventories are being well managed and debt is at a reasonable level.

Another Lynch favorite is Cleveland-based Cliffs Natural Resources (CLF), the largest iron ore producer in North America, which has been in business since 1850. Using the three-, four- and five-year historical earnings-per-share (EPS) growth rate of 32.55% and a P/E of 6.84, Cliff has a very impressive PEG ratio of 0.21 and its inventories are well managed.

The world's largest publicly traded copper company, Freeport-McMoRan (FCX), is also the world's largest producer of molybdenum and a significant gold producer. The company is headquartered in Phoenix, and it is a favorite of my Joel Greenblatt-based strategy. This strategy ranks companies by their earnings yields and ranks each company using all the stocks in our database. Freeport ranks 22. It then ranks companies on the basis of return on total capital, and here Freeport ranks 195. The final test of this strategy ranks each stock based on the combination of its rankings from the first two criteria, and among all the stocks in our database, Freeport ranks an excellent 27. You don't have to dig deep to be impressed by this mining giant.

All of these companies are well managed and well priced, and their industry is doing well, as the ISM study shows. They are all strong performers and worth your consideration.



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