Net/net, I do think the path of least resistance for the broader market is still higher into year end, in part because the shorts/bears don't seem to be very scared just yet. But let's do our poll once again and see if we can learn more about the current consensus and sentiment market setup:
When the results of this poll are overwhelmingly one side or the other, it's often an indicator that the markets are about to put in a big move. That is, when all the bulls are scared, it's usually a sign the markets will rally and vice versa.
Noah Blackstein, an old friend of mine who runs the U.S. and global growth portfolios for Dynamic as well as two hedge fund mandates, used to tell me that ETFs are for those too lazy to dig in and find specific stocks in a sector. A few months ago, I bought some calls on Market Vectors Gold Miners ETF (GDX) and later trimmed most of those down and locked in some profits. In the months since then, I've been digging in on a lot of various gold miner stocks, and using my Revolution Investing analysis on these individual names has left me underwhelmed about their prospects and I can see why GDX is struggling. Here are some of those notes.
Franco-Nevada Corp. (FNV) is an interesting company because it's one of the few mining/energy companies that didn't get loaded up on debt over the last decade -- $600 million in net cash and no debt. Yahoo Finance describes FNV as "a gold-focused royalty and stream company in the United States, Canada, Latin America and internationally. It also has interests in silver assets and polymetallic exploration prospects; platinum group metal, including palladium; other minerals, such as base metals, iron ore, coal and industrial and miscellaneous minerals; and oil and gas properties. As of March 25, the company had interests in 246 mineral assets and 137 oil and gas assets. It's proved reserves are 22,899 thousand barrels of oil equivalent."
But the company has a $7 billion market cap and isn't likely to earn much money for the next year or two unless gold spikes and oil can rally back to $60 or higher. Too much energy exposure for me to consider FNV a good play on gold mining.
Agnico Eagle Mines (AEM), on the other hand, is much more of a pure play on gold and silver and other minerals. Yahoo Finance says: "AEM engages in the exploration, development and production of mineral properties. It primarily explores for gold, as well as for silver, copper, zinc and lead."
But unlike FNV, AEM is loaded down with debt of $1.3 billion vs. just $300 million in cash. The company will be in trouble over the next few years if gold/silver/mineral prices don't rally from these current levels as AEM struggles to make much money at these prices.
I've already noted on these pages that Goldcorp (GG) needs gold to stay at least above $1,100 to likely survive the next couple of years despite all its debt. Goldcorp's balance sheet is about as wrecked as most of the other gold miners: $400 million cash but $3.5 billion in debt. GG is basically a call option on gold in the next year. If gold gets to $1,500, GG would probably be at $25 or $30 based on the increased earnings potential bringing increased financial flexibility. At $1,300, GG could be in the high teens.
"Longer term, I think gold could be $5,000/oz during my lifetime. The GDX call options were just a trade, though. Most gold miner stocks also have too much debt and if gold doesn't stay above $1,200, there could be some bankruptcies in the next few years in gold miner stocks, too."
And that's exactly what I'm finding. There's a real lack of profitability at the gold miners with gold back near $1,100 again. The long-term debt that most of these gold miners carry is problematic and investors in these stocks are basically betting that the price of gold will rise back to $1,200 or higher in the next few months so these gold mining companies can at least survive. The setup for gold miners is akin to the same analysis I've found with energy and oil stocks as most of the companies in the sector have too much debt and investors in oil stocks are basically betting that oil itself will rise back toward $60 or higher in the next few months so those oil companies can at least survive. I've also highlighted Freeport McMoran (FCX) over the last year or two as being in a similar setup.
So can you trust the next leg higher in gold or oil or any other commodity? Simply put, I don't think it's a good idea, as I've been explaining all year. While most every other investor/pundit and trader has tried to nail a bottom in the energy sector and energy stocks, we've been riding our Revolution Investing strategy to new highs as a Trading With Cody subscriber reminded me yesterday.
So I'll stick with my playbook, which will include a few mistakes along the way as I focus on finding secular growth industries and owning the best-positioned names, buying them when they're still cheap before the world realizes just how well they are revolutionizing things.