Taking Cover in a Gold Mine

11/17/2010 12:11 pm EST

Focus: GLOBAL

Timothy Lutts

Publisher, Cabot Heritage Corporation

If the correction after the market’s big run gets a little rough, one bargain-basement producer will stand out, writes Timothy Lutts of Cabot Wealth Advisory.

Over the past two months, most of the stocks we’ve recommended have gone up. But in all honesty, the real hero behind those gains is the bull market.

And as the old market truism says, “Don’t confuse brains with a bull market.”

We try not to, and by the same token, we try never to forget that the market can go both ways.  When it’s rising, it lifts all boats.  And when it’s falling, even the best companies’ stocks have trouble keeping their heads above water.

Right now, the tide is still coming in. Most boats are being lifted, and I sincerely hope you’re making the most of it.

But knowing that the pendulum on Wall Street swings left and right, I’m now expecting that some of the people who were responsible for creating those recent highs will have to sit through a period of…let’s call it discomfort…before their optimism is rewarded. 

Now, I’m not trying to call a top here. I’m well aware that trends tend to go farther than expected, and that stocks that are overbought can remain overbought.  Long term, I’m as bullish as anyone.

But the market is a two-way street, and for new investments today, an argument can be made for taking the low-risk route. At Cabot, that means [using] the classic value investing methodology that has worked so well for Benjamin Graham, Warren Buffett, and thousands of other patient investors who have mastered the science of buying low and selling high.

[We recently] had a special feature on undervalued companies with low price-to-book value ratios.

To select these stocks, we applied four additional criteria to the stocks in our database:

  • excellent financial strength
  • increasing dividend payments
  • low price-to-earnings ratios
  • strong earnings prospects

I’ll give you one of them here.  It’s Barrick Gold (NYSE: ABX):

Editor Roy Ward writes: “Barrick Gold, based in Toronto, is the world’s largest gold producer, with 26 mines in operation across five continents. The company’s new Cortez mine in Nevada is now producing 15% of the company’s total gold production at a very low $300 per ounce. Barrick has additional low-cost mines ready to start production during the next five years, which will lead to higher profit margins.

“Earnings per share surged 87% during the past 12 months and will likely increase another 17% during the next 12 months. At 14.3x [projected] forward 12-month earnings per share, ABX shares are among the least expensive in the industry. Goldcorp (NYSE: GG), Agnico-Eagle (NYSE: AEM), and Silver Wheaton (NYSE: SLW) sell at 33x forward earnings per share, or higher. ABX is medium risk.”

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