Taking Profits in Goldcorp After Big 20% Year-to-Date Rally

06/23/2014 5:00 pm EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

Given the fact that gold and many gold mining companies have rallied strongly as of late, MoneyShow's Jim Jubak is selling his shares of this leading gold mining company as of today, June 23.

I'm going to sell Goldcorp (GG) out of my Jubak's Picks portfolio today, June 23. I still think that portfolio needs gold as a hedge on inflation fears, but gold and, more especially, shares of gold mining companies have rallied big time on worries that the Federal Reserve is getting complacent about inflation.

I think the next step in the price of gold and gold mining shares is likely to be a pull back as traders and investors decide that inflation is not an immediate threat and then move to take some profits. I'd be surprised if both gold and gold mining stocks didn't pull back by 10%, or so, over the next month before resuming an upward trend. The last stages of a rally like this—off the May 27 bottom in an asset that has been so scorned lately—is largely composed of traders who sold short and who are now buying shares to cover. When that buying for short covering ends, it removes some of the fuel that had been driving shares higher. I'm not sure that we've seen a wide spread conversion from gold skeptics to gold believers in this move, so an end to short covering could easily produce a pullback.

What I'd like to do is sell part of my gold position now to take profits with the intention of buying back into gold after any pullback. I don't want to just buy and sell the same asset. My strategy is to sell a stock—such as Goldcorp—that has seen a bigger than average gain and then to buy a stock, such as Randgold (GOLD) that hasn't gained as much and that has a better cost and production profile than the stock I just sold. (Any purchase will come after the pullback, if we get it, and is almost certain to come after the July 4 weekend.)

Shares of Goldcorp were up 15.75% since May 27 through June 20 and were up 20.56% during the same period. At $27.88 at 2:30 PM New York time on June 23, the shares are way above my target price of $17 a share. (I'm still looking at a loss of 27.3% since I added these shares to the picks portfolio on November 5, 2009.)

One of my reasons to sell Goldcorp here (besides it recent appreciation, that is) is a curious gap that showed up in a chart of the company's production pipeline in its presentation for its April 10 investors' day. The chart showed very attractive prospects for six projects in the execution stage moving into the production stage. That should push up free cash flow at the end of 2014 and into 2016. (The company projects reaching free cash flow positive—that is cash flow including capital spending—in the fourth quarter of 2014.)

But then there's a big gap in the pipeline with only two in what the company calls the feasibility group—the category that most immediately feeds into execution—before the pipeline fills up again with nine projects in the scoping and pre-feasibility categories. The consequence of that, projections from Credit Suisse show, is that while free cash flow rises dramatically in 2016 the growth rate slows in 2017 and then free cash flow actually falls in 2018.

Now 2017 and 2018 are indeed a long way off but the nearer term increases in free cash flow are likely to get revised downward as the gold mining sector recovers and companies begin to increase capital spending again. Think of a robust pipeline as the margin that ensures that free cash flow will continue to increase even as capital spending does.

A gold mining company's production pipeline is also leverage for the future that will multiply the effects of any increase in gold prices.

Goldcorp has less future margin and less future leverage than I'd like at current share prices. I'll be looking to upgrade in those two areas if we get a pullback after this rally.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.

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