Follow the Gurus to the Best Gold Stocks

 | Dec 01, 2011 | 4:37 PM EST  | Comments
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Stock quotes in this article:

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abx

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iag

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nsu

Some smart money is buying gold nowadays. The currency upheaval in the eurozone and the high debt found in many countries are reviving interest in gold.

The New York Times recently wrote about Byron Wien, vice chairman of Blackstone Advisory Partners, who historically has not been a gold bug, officially recommending this year, for the first time, gold in his model portfolio. The article reports, "As governments print money, thereby debasing the value of their currencies, gold still looks like a sensible option."

An article by Matthew Lynn in The Wall Street Journal, tellingly titled "Gold is the only winner from the euro crisis," also recommends gold. Lynn says the euro crisis will result in either the European Central Bank buying eurozone bonds on a "massive scale" or "for the currency to break up in a chaotic and disorderly way."

If the ECB buys up debt, it will have to print lots of money, and that would lead to an increase in demand for gold, just as happened when the U.S. Federal Reserve's program of quantitative easing led to a surge in the price of gold during the past two years. If the eurozone breaks up and countries go back to individual currencies, chaos will result, and that would boost the demand for gold, because, states Lynn, "the precious metal always benefits from chaos."

In times of financial trouble, gold has long been used as a safe haven, and the world economy could certainly be considered to be in financial trouble at this time.

Fortunately for investors who want to add this hard asset to their portfolios, several gold stocks now look like good investments. All of the ones I talk about below get very high grades from the guru strategies I use to choose stocks. These are strategies I based on the strategies used by savvy Wall Street investors. Also, these companies are all headquartered in Canada.

One of these is Yamana Gold (AUY) an operator of South American gold mines. I have a strategy I based on Peter Lynch's writings, and according to this strategy, Yamana represents a very desirable investment opportunity at this time. In particular, the strategy highlights the company's P/E/G ratio, which is the price-to-earnings ratio relative to growth and is a measure of the price the investor is paying for growth. A P/E/G of 1.0 or less is acceptable, and Yamana's P/E/G is a very strong 0.57. Also in its favor is a very low level of debt.

Another Lynch strategy favorite is Barrick Gold (ABX), the world's largest gold producer. Close to half of its production comes from North American mines, and most of the rest is fairly evenly divided between South America and the Australia-Pacific region. Barrick operates 26 mines and has, according to the company, the largest reserves in the gold industry. As impressive a P/E/G as Yamana's is, Barrick's is even more favorable, at just 0.36. However, its debt level is considerably higher than Yamana's.

Nevsun Resources (NSU) operates gold in mines in Africa, where it also produces additional metals such as copper, silver and zinc. Nevsun is favored by a strategy I created from the writings of Joel Greenblatt. The strategy ranks each company out of the thousands in our database by its earnings yield and its return on total capital. Then it combines these two rankings to produce a final ranking. Nevsun is ranked 20 by its earnings yield and 146 by its return on total capital. When these factors are combined, Nevsun is ranked an impressive 11 out of all the stocks in our database.

One last gold stock I want you to know about is gold miner IAMGold (IAG), formerly known as International African Mining Gold Corp. The company has operations and development activities in North America, South America and Africa, and it is a Lynch strategy favorite. Its P/E/G is a solid 0.60, while its debt is very low.

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