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Value Pair: Mining and Refining

04/24/2014 8:00 am EST


John Buckingham

Editor, The Prudent Speculator

We do not simply turn a blind eye to all of the bricks in the Wall of Worry, but we can’t help but be enthusiastic about the long-term prospects for our broadly diversified portfolios of undervalued stocks, says John Buckingham, value investor and editor of The Prudent Speculator.

Yes, we realize that the earnings multiple on the S&P 500 (SPX) of more than 17 is on the high side of the historical norm, but the P/E ratio on our portfolios is several points smaller, earnings are growing, and interest rates have almost never been lower.

Also, the dividend yield of 2.4% on our model portfolio compares nicely to the 1.8% current yield on the 5-year US Treasury, as, at previous market highs in 2000 and 2007, the latter was yielding 6.5% and 4.4%, respectively.

Our recommended stocks—including the two commodities plays featured below—trade for significant discounts to our determination of long-term fair value and/or offer favorable risk/reward profiles.

Yamana Gold (AUY)

Yamana Gold is a gold producer, developer, and explorer with assets in Central and South America. Despite an overall tough go for gold since the beginning of 2013, the company has maintained a focus on reliability, which includes the growth and protection of reserves, resources, and production inputs.

Although Yamana is heavily invested in gold production, it is also a copper and silver miner and is well-positioned to continue increasing its production capacity over the coming quarters.

The firm is currently targeting 1.4 million ounces of gold equivalent production for 2014, with a longer-term target of 1.7 million ounces per year.

Although we are not banking on a grand resurgence in gold prices over the near term, we like that management is working to capitalize on the current depressed gold price environment to maximize margins via cost cutting and containment.

Yamana has one of the lowest cash operating costs in the industry. With our view that a gold miner or two is a valuable hedge, we find AUY to be a welcome addition to our diversified portfolios.

HollyFrontier (HFC)

HFC is one of the largest independent petroleum refiners in the US with operations throughout the Midwest, Southwest, and Rocky Mountain regions.

We like that its refineries are in good locations with relatively easy access to multiple pipeline networks, and that it sells its products in some of the fastest growing markets in the country.

We believe the combination of refinery complexity, crude flexibility, and growth markets gives HFC strong competitive advantages. Furthermore, management expects a more stable operating environment in 2014, following heavy maintenance in 2013.

The firm generates strong free cash flow, supporting healthy regular and special dividends. While most publications will show a 2.5% yield for HFC, including special dividends (that have been paid since Q3 2011), the actual payout is 6.7%.

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