As I read though the latest round of 13F filings, a few things became clear to me. First, a lot of folks are paying money for what are basically market index clone portfolios. Many of the leading money managers look exactly like one other, and they all resemble the S&P 500. I have never understood running index-type portfolios and just tweaking the weightings. If you love tech and hate autos, then buy tech and sell autos, don't under and overweight the allocation. The amount of money being managed in this fashion is staggering. But I guess I should be grateful, as it creates opportunities for a value guy like me.
The other thing I noticed is that many very smart people like gold and gold-mining stocks at this level. Fund managers John Paulson and David Einhorn have led the charge on gold for a couple of years with very mixed results, but other value types are getting involved. Deep value types like Michael Price, Seth Klarman and Donald Smith are starting to include companies whose main business is digging for the shiny metal. There could not be two more different investors than Julian Robertson and John Hussman, but both are buying gold miners this year. This captures my attention and has me taking a deeper look at the sector.
I am not a gold bug by any stretch on anyone's imagination. I have no interest in holding physical gold that is not in the form of a watch or shiny gift for the wife. The doomsday scenarios I hear from many gold bugs makes me suspect that tin cans full of green beans and little cylinders of lead will have far more value than gold if events actually came to pass as outlined. In spite of that, I am aware that there are many gold bugs, and gold has substantial value for the jewelry and industrial markets. There is money to be made digging the stuff up. The mining stocks recovered a bit last week but are still down more than 16% year to date.
Of the gold mining stocks snapped up by noted investors, the cheapest on a price-to-book value basis is AuRico Gold (AUQ). The Canadian-based company has gold and silver mining exploration and development operations in Canada and Mexico. The stock is trading near 52-week lows after falling short of analyst expectation and is well below year-ago levels. The company is focusing its efforts on the lower cost North American operations and is shedding projects that are more expensive. High employee turnover at the northern Mexico operations and the departure of the CEO for health reasons have also weighed on the stock recently. The stock trades right at tangible book value and has an intrinsic value of almost twice the current stock price. I will probably start scale-buying this stock in the days ahead.
Yamana Gold (AUY) was also a favorite of value investors last quarter with both Donald Smith and John Burbank of Passport Capital buying shares of the miner. The Canadian company has operations throughout South America. The company missed on both the top and bottom line in the second quarter but it has been able to grow production via new projects and acquisitions. The stock seems fairly valued right now at 1.5 x tangible book value and a slight discount to my $18.80 intrinsic value calculation.
One of the more speculative gold mining stocks is NovaGold (NG). The shares have been in a steady downtrend and just took another hit earlier this month when it was announced that Barrick Gold (ABX) was delaying production on property the two companies own jointly. The company has been losing money for some time. The stock doesn't look particularly cheap on a book-value basis, but on an intrinsic-value basis, Nova Gold trades at about a 20% discount of my valuation estimate. It is intriguing that John Paulson and Seth Klarman, two investors with extensive experience in distressed companies, were buying shares last quarter. This one is intriguing, with what looks like huge upside potential, but deeper digging is needed.
Gold as a metal holds little interest for me. Gold mining, however, is a business like any other and some very smart and successful investors believe the sector is getting cheap. The sector is worth doing some digging and monitoring to uncover safe and cheap opportunities.
