The 27% Winner Speaks: Buy Steel

03/04/2011 11:34 am EST

Focus: COMMODITIES

Ken Kam

CEO, Marketocracy, Inc.

Sell gold and buy steel. This may be the new strategy of the year, at least according to an expert who has averaged 27% returns for the past six years. In an exclusive interview with MoneyShow.com, Marketocracy founder Ken Kam explains how his Web site, which tracks the portfolios of talented amateur investors, discovered this market maker’s winning approach.   

Could you tell us a little more about this person, and what he’s doing?

This person’s name is Tim Siegel. He’s a patent attorney who lives in Washington. He’s got a six-year track record with us, where he’s averaged about 27% a year. So, he’s not at the top of the list, but he’s way up there.

I’ll take it.

I’d take it, too. A lot of people would. What’s interesting about what he’s doing now is that some of his biggest winners the past few years have come from betting on gold companies. As the price of gold has risen, he’s done fantastically well.

So, he believes now that everybody has discovered this. It’s no longer a secret. The price of gold has already risen. Whatever analyst coverage there is, is giving universal buy signals.

So how many gold-mining companies does he own now?

That’s the interesting thing about him. He doesn’t buy them all. He buys the one that he thinks is the best value. The one he picked was Allied Nevada Gold (NYSE: ANV).

And the reason he picked it was because when he did, it had no analyst coverage, and their mines were not producing. So, say you have a gold mine, but there’s no gold coming out of it—a lot of people wonder whether you have anything of value.

Now, that was five years ago, when the price of gold was closer to $400. As the price of gold has risen, it’s become economic to reopen the mines and mine them again. So, the risk that the mines have gold has been eliminated.

When he bought it, there was no analyst coverage. Now there are ten analysts that cover it, and they all recommend strong buy. The stock has more than quadrupled over that period.

And he’s selling.

And now he’s selling.

Okay. So, he’s taking the money and putting it into steel?

That’s right. He’s buying AK Steel (NYSE: AKS).

The reason he’s doing it is because steel had a terrible year last year. AK Steel had a particularly terrible year, in conditions that were so chaotic that they were actually selling steel for less than it cost them to make it for a period.

How’s that possible for a commodity?

Well, it’s possible because the price of iron ore is set at the beginning of the year. Last year, prices were changing so quickly that they weren’t able to know what the final price was going to be until after they had to agree to deliver at a certain price.

That situation has totally changed now. So, the losses that they reported last year are unlikely to be repeated.

One additional factor: He sees the US economy picking up steam again, and steel is one of these things that’s expensive to ship across the ocean. So, it gives an advantage to domestic producers.

We still import 20% of our steel here, so there’s a tremendous amount of growth that a good, efficient domestic producer can experience if things change just a little bit in its favor. That’s what he sees in AK Steel.

What about the analyst coverage on that?

Universally negative. They don’t call it the “Rust Belt” for nothing.

So, this is the kind of stock that he likes at this point.

Yes. I think in general what I have seen him do well is pick stocks that no analysts cover, and then sell them when it picks up a lot of analyst coverage and everybody is recommending it as a strong buy.

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