I enjoyed the back and forth between Jim Cramer and Brian Sozzi on geopolitics this morning. Geopolitical events certainly can move the markets for time to time. The Ukrainian situation is particularly worrisome to many investors because of the direct and potentially devastating economic consequences to Europe.
I am a news junkie and love talking about politics and global events but I go to great lengths to keep it out of my investing activities. Instead, I keep my head down and look for cheap stocks.
If you dig stuff out of the ground for a living right now, business is tough and your stock price is probably very low. The global economy is very slow and it will take some time before the demand increases in this industry.
Although gold and silver are nice and shiny when they are out of the ground and polished, the business of digging them up is a dirty one. At the heart of it, the precious metals industry is mining and you are going home with dirt under your nails most of the time. Although the miners sometimes trade with the swings of the metals they produce, they are still businesses and can be valued as such. Right now, many of them trade at substantial discounts to book value and are attracting the attention of asset-based, deep-value investors like me.
Coeur Mining (CDE) has been a holding of mine for about a year or so now and so far the stock has not done much. Silver has been basically flat for the past year. The company is struggling to turn a profit but has increased production and cash flows were up in the second quarter. The stock is trading at just 50% of book value at this level and the upside is huge.
I am not the only one who likes the risk-reward profile for this stock, as noted value types including Donald Smith, Royce Funds and David Dreman have been buying the shares this year. The people running Couer Mines are also pretty positive about the future of the company and the stock price: Both the CEO and CFO have bought some shares this month.
Allied Nevada Gold (ANV) is another precious metals miner that is starting to attract the attention of investors. The company has mining operation in the state of Nevada. In addition to its operation of the Hycroft Mine near Winnemucca, Nev., the company has more than 70 exploration properties in the state. Allied Nevada produces unrefined bars of gold and silver that are sent to refiners and they receive a percentage of the final sales price. Allied Nevada has ramped up production this year with gold production up by 45% and silver production up more than 200%. The stock is currently trades at just 45% of tangible book value. Its bargain price has attracted some smart buyers, including George Soros, John Paulson, Third Avenue and Paul Tudor Jones, who all have large stakes in the name. When gold recovers or rallies, these stocks could move much higher very quickly.
I am not a precious metals expert and have no idea when prices might recover. I do know these stocks are cheap right now. It is reasonable to assume that at some point in the future, inflation pressures, geopolitical events or just solid demand increases from a recovering economy will cause a rise in metals prices. As current conditions are shaking out weak hands and marginal players, the surviving gold and silver miners will likely garner sharply higher profits and substantial gains in the prices of their stocks.
