Energy & Gold: "Correction" Buys
12/10/2004 12:00 am EST
Last month, Eric Roseman correctly warned, "Don't be alarmed if commodities begin a correction soon. This reversal will be violent, but only temporary, and we'll aggressively buy amid this weakness." Here, he offers two commodity-related favorites-in energy and gold.
"The single variable bothering me the most in late 2004 is that dollar bearishness is just everywhere. At investment conferences, trading desks, hedge funds, brokerages- nobody is positive about the dollar. When you have consensus like this in the markets, it's highly dangerous. Over the next several weeks, I do expect the US dollar to rally. It will probably hit all commodities, including gold. But don't be shaken by this short-term event. The dollar's rally won't last long as US economic growth slows in the fourth quarter, and deficits just get worse. Plus, interest rates won't rise much, either, over the next six months. As the market draws a similar conclusion about slowing growth and a peak in this interest cycle, the dollar will eventually head to the basement again. When this happens, commodities will embark on the best part of this rally that started in 2002. It will be nothing short of spectacular.
"We remain extremely bullish on energy. Get aboard this stock now and ride one of the few truly undervalued oil and gas companies in the market. Here we have a great turnaround story, strong management and a technically supportive stock price since late October. Plus, we're in the company of insider buying. Based in New Orleans, McMoRan Exploration (MMR NYSE) is engaged in the exploration, development, and production of oil and gas, offshore in the Gulf of Mexico and onshore in the Gulf Coast region. The company has been struggling to restructure its operations and return to profitability over the last few years and the stock price clearly shows a bearish trend- until late October.
"I think MMR is now turning the corner. Though losses continue to mount this year, the company is growing its revenues dramatically. At some point, higher gas volumes and surging oil and gas prices are going to positively impact earnings. The stock is now starting to reflect that scenario since early November. McMoRan is a small company with big potential. Unlike other oil and gas companies, which are now fetching rich premiums, MMR is trading for a song. It has assets but continues to struggle with cost, which explains why the stock is distressed and trading at such a low premium to other oil and gas concerns.
"In my eyes, this stock formed an important bottom in late October following the purchase of 100,000 shares at $12.75 by an insider at the company. The transaction, dated October 1, totaled $1.3 million dollars. That's a significant sum for two reasons: First, the average insider purchase is just $65,000. Secondly, the trend, as I mentioned, is net selling. When a purchase of this size occurs, it's worth following the stock's price action for several weeks and then making a purchase to ride the insider's coattails. Meanwhile, MMR formed a technical bottom in November and now trades at $15.30. The stock has declined 18.5% in 2004. MMR is still 24% off its 52-week high and should be purchased now as the trend in the stock price is very bullish.
"Among my top recommendations is Goldcorp (GG NYSE). Since our recent recommendation for the stock, Goldcorp announced a merger with Wheaton River that will create the world's 8th largest gold company, with a market cap of $5 billion. The combined company will have an average cost per ounce under $60. 2005 gold production should reach at least 1.1 million ounces with the new company sporting a strong balance sheet with over $500 million in cash and gold bullion with no debt.
"Our caveat regarding gold is our forecast that a short-term US dollar dead-cat bounce will take gold back down to around $410-$425 before the next leg to $500. That's a big IF. If you're a long-term investor like me, then Goldcorp at this price is a superb purchase. Over the next several years, the dollar will head even lower, deficits will rise and global economic and political events will trigger a massive flight-to-safety. With each passing day the Euro gets stronger, the day of reckoning for the currency gets that much closer. This will be extremely bullish for gold.Gold is the ultimate currency in the 2000s where no country wants a strong currency because of relentless export competition from Asia and a massive increase in deficits. Germany, Italy, France, and other Euro members are now breaching their deficit limits. In my opinion, you must have gold bullion and gold stocks this decade.
"Meanwhile, here you have a terrific company, Goldcorp, merging with Wheaton River. The latter has gold and silver properties in Argentina, Brazil, and Mexico, and strong management. For the last year, Goldcorp chairman, Rob McEwen, has been seeking a successor ahead of his planned retirement. He found an experienced hand in Ian Telfer, Wheaton's CEO. The market, in my opinion, is making a monumental error by not significantly revaluing Goldcorp. The company is now is a major player with one of the best balance sheets in the industry and home to the lowest production costs in the gold mining business. I'm more bullish than ever on Goldcorp."