As a group, the the gold producers, developers and exploration stocks are very undervalued today, including the major mining companies, asserts Adrian Day, resource sector expert and editor of Global Analyst.

Gold stocks have been lagging bullion since 2011, and the gap continues to be wide. In fact, the gap between gold and gold stocks is wider today than it ever has been. If you are bullish on gold, you should be even more bullish on gold stocks.

Gold stocks also remain considerable cheaper than they were in 2010-2012. Despite the big run up in gold stocks this year — and up 350% since early 2016 — they are still significantly less expensive than there were at the previous peak.

More important than mere price is value. If we look at valuations, the story is even more compelling. On every valuation metric, the gold stocks today, despite record gold prices, are in the lowest quartile on a historical basis.

On a price-to-book value, the gold stocks over the past five years have traded at the lowest multiples ever. As stock prices have gone up, so too have the book values of mining companies. At 1.3 times book, the major miners are trading at a better-than 40% discount to their trading range from the early 1980s to 2013.

Even more compelling is price-to-cash flow: other than the last quarter of 2018, the gold stocks have never been cheaper! For most of the past 35 years, gold stocks have traded at two to three times the current valuations. And when the gold price is strong, multiples tend to expand, so it would be usual were valuations above average today.

Gold stocks remain about the most idiosyncratic of any sector; one company can be a disaster even while the sector is strong. So selection remains critical. But this is unquestionably the time to take advantage of this anomaly in prices and valuations of the largest mining companies.

I am often asked, which are your top gold stocks? There is no easy answer because the question lacks precision. Top for greatest short-term potential? Top for lowest risk? Top for long-term holdings…for certainty of moving up with gold…and so on. “Top” can mean a lot of different things and it usually does to different investors.

For someone completely new to the gold sector, we shall answer this question: if I were to buy four gold and silver companies today, to hold for the next three or more years, what would be those companies be?

In framing the question thus, I assume the investor wants stocks with reasonable certitude to rise if the gold price rises; he wants low risk; and he doesn’t want to be figuring out every week if he should continue to own.

In this list, I am, less concerned about a stock’s price today; we are buying companies rather than stocks. On that basis, here are my “top” gold and silver stocks.

First, Franco Nevada (FNV) the largest of the royalty companies. We favor over Royal because it has a strong balance sheet; a more diversified revenue base; and a deeper pipeline.

Second, Barrick Gold (GOLD). I favor Barrick the world’s second-largest gold miners over Newmont, #1, because of better management, stronger balance sheet, and higher free-cash flow.

Agnico-Eagle Mines Ltd. (AEM) along with Barrick, my favorite of the big cap miners. With a focus on Canada, it has first-rate management, solid balance sheet, a good pipeline, and spends money on exploration and alliances with exploration companies.

Lastly, Pan American Silver (PAAS) the largest of the silver producers outside of Mexico, with a diversified asset base, strong balance sheet, and two high-potential assets (acquired from troubled companies), either one of which could add significantly to the company’s production and NAV.

Now, as an investor or trader, we would not necessarily buy each of these at today’s price. You know this from our recent comments on Franco, for example. But, if you want to buy four great companies and hold for the next few years, this basket represents the best of the best.

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