If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
01/13/2006 12:00 am EST
Ian Wyatt has long been know as an expert on uncovering lesser-known, emerging firms, particularly in the high tech and Internet arenas. He has also developed an increasing expertise in resources. Hence, his top picks are "SOLD and gold"—an Internet play and a resource trust.
"Bought or sold a home or condo recently? Chances are you used the Internet at some point or another in the process. According to the National Association of Realtors, 77% of home buyers use the Internet for home buying research. And yet only $800 million or 4% of real estate ad dollars are spent online. This creates a massive opportunity for HouseValues (SOLD NASDAQ), which is our speculative pick for 2006.
"This a pure play on the high growth Internet advertising space. HouseValues targets the 1.2 real estate agents that spend $11 billion in advertising annually. The company offers advertising solutions that provide realtors with local leads of individuals who are looking to buy or sell their homes. The company aims to educate realtors about online advertising, and provide them with the necessary tools to grow their business. As of this fall, HouseValues had 15,000 realtors signed up for its subscription service, paying $139 - $1,299 per month. In the recently reported third quarter, the company reported an 82% increase in revenues to $23.3 million, with net income of $4.3 million or $0.16 per share.
"In spite of continued solid financial performance, HouseValues shares are trading at $13, down 35% from their July high of $20. The main reason? Fears that a housing slowdown will mean lower sales for HouseValues. What investors appear to be missing is the fact that realtors spend more on advertising, not less, during more sluggish housing markets. As a result, investors can today buy HouseValues shares at just 18x 2006 consensus earnings estimates. For a company expected to grow 50% in the next 12-months, this seems downright cheap.
"Meanwhile, I never thought I would say this, but for my conservative pick is StreetTracks Gold Trust (GLD NYSE), an ETF that tracks the price of gold. Its purchases gold and trades at 10% the price of an ounce of gold. In fact, it's never been easier for individual investors to buy gold. We believe that this ETF will only make it easier for investors to speculate on the price of gold, and could be one of many growth catalysts for gold in the coming years."
"Important in our assessment is gold’s relationship to oil. The price of gold bullion and crude oil are highly correlated. Over the past 60 years, one ounce of gold has on average purchased 15.2 barrels of oil. With gold trading at around $525 per ounce and crude oil trading at $59, this ratio today stands at 8.9. Historical data shows that when the ratio falls below 11 (meaning one ounce of gold will buy you 11 barrels of oil), the ratio not only will come back in line with the average, but that speculation drives the ratio above the historical average of 15.2, as has been evidenced every time that the ratio fell below 11.
"With huge demand coming out of the booming Asian economies, oil is unlikely to decline below $50 anytime soon. So, let's assume that the price of crude oil falls to $50 per barrel. Using the historical 60 year average ratio of 15.2 barrels of oil per ounce of gold, this would mean that the price of gold would move from $525 per ounce to $760, an increase of 45%. Assuming the ratio moves above 15.2 on over-speculation in coming years, and we could easily be looking at $900 or even +$1,000 per ounce of gold."
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