US Global: Contrarian Call on Gold and Energy

11/04/2013 10:00 am EST


Frank Holmes

CEO and CIO, U.S. Global Investors, Inc.

Frank Holmes, chief investment officer of US Global Investors, explains why his funds are positioned for long-term gains in gold and energy, despite these sectors being currently under-appreciated by the investment community.

Steve Halpern: We are here today with Frank Holmes, CEO and Chief Investment Officer of US Global Investors, an investment management firm that specializes in gold, natural resources, and emerging markets. How are you doing today Frank?

Frank Holmes: Outstanding!

Steve Halpern: It's good to hear from you. Before we look at some specific investment themes, could you tell us a little about US Global and the areas that it focuses on.

Frank Holmes: Well, US Global has a strong reputation in resources and emerging markets. They're our biggest asset classes and I think that really differentiates us in our research and our investor alert that goes out to 40,000 people in 70 countries. We've received 29 Lipper Awards, in particular, funds in Eastern Europe, Latin America, resources, gold, et cetera, and I also wrote a book on gold.

Steve Halpern: And the gold and natural resource market, isn't new for US Global? You've been around for a long time, haven't you?

Frank Holmes: We have. In fact, US Global is the first no-load gold fund.

Steve Halpern: Okay, it's been about 30 years or more, correct?

Frank Holmes: Correct, but I'm a Tex-Can, so I've only been living as a Canadian in Texas for the past 23 years, so yes, it was founded before I purchased control of US Global.

Steve Halpern: Okay, in your recent commentary, you noted that asset classes like gold and energy are currently under-loved and under-appreciated, yet you take the contrarian view and see upside opportunity there. Could you expand on that?

Frank Holmes: Sure. I think there's some really important facts is that you've never seen this before, Steve, and that is where the dividend yield on so many resource companies is greater than the five-year government bond and the ten-year.

And what's also very compelling is that the five-year government bond is below the CPI number, so anyone buying a five-year government bond is losing money, but you could turn around and buy resource stocks that are growing top line, growing their cash flow, inexpensive, and when we're looking at institutional research on generalists, they're at a record low of owning energy stocks and material stocks.

So, I think it's a very compelling reason based on growth, and you're seeing industrial stocks starting to rise here and garnering strength.

Industrial companies need these commodities, and I think the other last thing to share with you, and I've written about this, and that is I believe that the cheapest reserves are listed.

And why I say that, is because we're seeing smart money like Carl Icahn as an investor going into the energy companies, seeing how inexpensive they are for their growth profile and taking up management.

And we're also witnessing takeovers and the takeovers aren't a 20% premium over the past 20 trading days, they're 80%, 100%, 120% premiums to the current stock price, as companies are saying these reserves, they're already listed and known, are cheaper to buy.

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Steve Halpern: Now regarding energy, you've been particularly bullish on developments in Texas and the state's growing potential is supplying our domestic energy markets. And at the same time, US Global is headquartered in San Antonio, which puts all of your managers and analysts close to this action. Does that give you a strategic advantage in analyzing that market?

Frank Holmes: Yes, this is basically like an energy, as an energy going to a concert and there's a buzz in the community, from real estate being snapped up, activities being charity, people giving money to schools, just that sort of recycling, and hearing these stories of people receiving $50 million because they sold their ranch, that ten years ago, you couldn't get $800,000 for.

So, that creates that buzz, and our guys, it's easy for us to quickly go and go to the petroleum club or just get in a car and drive south of here and see the Eagle Ford and grasp some of the significance of what is taking place.

Steve Halpern: Before I let you go, would you be kind enough to highlight some of the top gold or energy holdings in your funds potentially...

Frank Holmes: Sure, sure, like companies that are in tech-a big holding is Pioneer Natural Resources (PXD). It's an oil and gas company based in Irving, with key oil and gas assets in Eagle Ford Shale and the Permian Basin.

It's often discussed as an acquisition target by major oil companies, has been a large holding for US Global Resources Fund and the stock is up 95% year-to-date, and still could trade higher.

Enterprise Product Partners (EPD) is another; it's a mid-stream MLP with a dividend yield of 4.4%. It's based in Houston and its one of the biggest and most successful MLPs over the last decade.

They dominate the processing, transportation, and storage of NGLs, natural gas liquids, which is growing rapidly from the huge development in the US and Canadian oil and gas shale plays. That stock is up 26% year-to-date.

Valero (VLO) is the largest refining company, independent refinery in the US with operations in Canada and Europe.

Its cheap natural gas from discounted oil from shale and oil sands give Valero a huge competitive edge versus its global peers, because those buying oil and gas from Eastern Europe, from Russia, have to pay a ratio and it basically puts gas prices like $10 in MCF and here, they're under three. This stock is up 33% year-to-date.

So they're big cap stocks, they have great growth profiles. One is reflective of a potential takeover, so we think that that also gives it some excitement.

And then we've had some of our mid-cap ones that are in Columbia; one of them has just been bought out, Petrominerales (TSX:PMG) and that was taken on a huge premium; the company that bought it is Pacific Rubiales (TSX: PRE), and we love that company also.

It trades at a low perform a total of two-times cash flow, a dividend yield of almost 4%, and a growth profile that is significant. Probably if someone wanted to go into Columbia, it's now the second biggest oil producer, they would buy that out; so we like those types of stories.

Steve Halpern: So investors could look at any of these individually or they could gain exposure to these through the US Global funds?

Frank Holmes: Correct, and our fund is a dynamic process fund. That is, it looks for who has the greatest growth and a relative basis, who has the lowest PE and cash flow multiples, who has the potential or is paying dividends, and it goes from mining into oil and gas.

It has an already exposure to gold, so you don't have to go buy the golf fund. It already has close to 10% exposure to gold stocks and gold notes, so it has that sort of overall balanced position. The S&P 10 sectors-the S&P 500-about 13% of its basic materials is in energy.

And interestingly enough, most of the generalist or fund managers up there have less than a 2% weighting in these categories, so we think that the industrials are showing a strength of resurgence.

China has record oil imports. It only bodes well for domestic stocks and I think when the generalists start moving in, because of these relative attractive valuations, we're going to see these stocks have a spectacular move.

Steve Halpern: Well, thank you for joining us. It's really been good talking to you.

Frank Holmes: Thank you.

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