Nickel and Gold

10/14/2005 12:00 am EST


Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocelynn Drake is a leading equity analyst for Schaeffer Investment Research. Her two latest featured stocks fall in the resource sectorgold mining firm, Goldcorp, and nickel miner, Inco. Here's her technical and fundamental outlooks for these issues.

"Vancouver-based Goldcorp (GG NYSE) is a gold-mining company that produces 550,000 ounces of gold each year. The company has five million ounces in reserves from its two mines in Ontario and South Dakota. Additionally, 5% of the firm's sales are gleaned from sodium sulfate. GG has been a major beneficiary of gold's recent run higher. The stock has maintained a nice uptrend since mid-May, rising nearly 75% along consistent support from its ten-week moving average.

"Additionally, the stock is a leader among its peers. During the past five months or so, the equity has outperformed the streetTRACKS Gold Shares index, in terms of relative strength. GG's weekly relative-strength measure is now testing support at the site of its ascending ten-week trendline. Our Equity Scorecard gives the stock a rating of eight, thanks to some encouraging indicators on the sentiment front.

"The stock's put/call open interest ratio has spiked up during the past two months to 0.53, a reading higher than 84% of the past year's data. Implied-volatility readings on near-the-money and at-the-money puts are slightly inflated over historical levels, suggesting some straightforward put buying may be the culprit for this surging indicator (as opposed to premium selling). Also, the security has managed to overcome the 15, 17.50, and 20 strikes in the October series.

"The fact that the stock has triumphed above a potential options-related barrier is an encouraging sign. Meanwhile, short interest on the stock has spiked up 170% since April and is now at an all-time high, suggesting a faction of pessimistic investors that could ultimately reverse to the bullish camp. Lastly, Zacks reports that eight of the 14 analysts following the stock have named GG a ‘hold,’ while two designate it a ‘strong sell.’ As a result, Goldcorp stands to benefit from future brokerage upgrades, which could carry the shares higher.

"Inco Limited (N NYSE) is the world's number-two producer of nickel. It also mines and processes copper, gold, cobalt, and platinum group metals and makes nickel battery materials and powders for use in catalysts, electronics, and paints. Its primary operations are in Canada, Indonesia, and the UK. With gold and copper near record levels, it's easy to understand why the security has done so well recently. In fact, Inco has outperformed the S&P 500 since September 2001.

"Surprisingly, traders have yet to jump on Inco's bandwagon. The equity's put/call open interest ratio rests at 0.71 and is higher than 85% of all those taken during the past year. In other words, options speculators have been more bearishly configured toward the shares only 15% of the time during the past 12 months. Meanwhile, short sellers are starting to abandon their bearish bets. In September, short interest for the security dropped by 8% to 7.5 million shares. However, the stock still has an impressive short-interest ratio of 6.48 days to cover. A continued unwinding of these positions could fuel additional gains in the shares.

"Wall Street is still somewhat skeptical of the shares. Zacks reports that nine of the 16 analysts following the stock rate it a ‘hold.’ Any upgrades from this pack of pessimistic could buoy the shares even higher. Overall, the stock has scored an impressive 9 out of 10 on our Schaeffer Equity Scorecard. Such a high reading indicates that the stock may still have additional upside ahead of it as this pessimism unravels in the form of fresh buying power.

"Of course, no picture is perfect. I do have one concern, as peak October call open interest resides overhead at the 45 strike and the stock could encounter some options-related resistance. However, November and January call open interest is extremely light, leaving the door open for future gains. Further, I think there is still ample sideline money available to help push the stock through this region."

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