Among the many features found in each week’s edition of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization).
The equity markets were in fine form during the latest six-week period covered in our latest Industry Price Performance rankings, with several of the major market benchmarks reaching all-time highs during this stretch. The S&P 500 Index was up 2.5% between June 3rd and July 15th, while the NASDAQ advanced 4.3%. From an industry perspective, two long-suffering commodities groups separated themselves from the pack. Precious Metals rose a stellar 14.5%, while Metals & Mining (Diversified) advanced 11.6%. Otherwise, investors weren’t especially discriminating. More than 80% of the groups that we follow delivered positive total returns for the six-week stretch, though a fairly modest gain of just under 5% was good enough to qualify for a spot in our top seven.
In looking for investment ideas among the seven best-performing industries, we are starting at the top and the Precious Metals stocks. Notably, this is rather unfamiliar territory for this group. A June rally in gold and silver helped fuel the recent share-price gains, but these equities have otherwise faced mostly stiff headwinds from commodity price movements in recent years. At recent levels, for instance, gold is trading about 30% below its peak in 2011. As a result, despite the ongoing bull market, precious-metals investors have had a tough time making money in recent years. Through the end of June, in fact, virtually all of the stocks included in our coverage showed negative total returns for the preceding three years, with many losing a third or more of their value.
Despite this rather unenviable track record for this stretch, investors may still wish to allocate a small portion of their assets to gold or gold mining shares as a means of increasing the diversification of their portfolios. At the moment, we have limited enthusiasm for Franco-Nevada Corp. shares (FNV.TO), which was the only gold stock we follow to produce a positive total return over the past three years. The rich valuation at which this untimely equity now trades, leaves us thinking that most investors will want to await a better entry point before taking a position here. For those looking to dip a toe in the gold market, though, Goldcorp Inc. (GG) may well be worth a closer look.
Goldcorp Inc. produces gold, silver, and base metals. Of the Precious Metals stocks we follow, it is the largest by market capitalization, just edging out Barrick Gold (ABX) for this distinction. Like most of the other gold miners, Goldcorp is incorporated and has its headquarters in Canada.
The company’s operations are located entirely in the Americas, including Red Lake, Porcupine, and Musselwhite in its home country; Peñasquito and Los Filos in Mexico; Wharf in the U.S.; and Pueblo Viejo in the Dominican Republic.
Goldcorp looks well positioned to be one of the fastest growing senior gold producers in the years ahead. The company aims to produce about 3.0 million ounces of the metal in 2014, which would represent roughly 15% growth from last year. Peñasquito and Pueblo Viejo should contribute nicely to these gains, along with initial production from new mines in Argentina and Quebec. This momentum may well accelerate a bit in 2015, owing to rising output from two of the aforementioned new mines and another one in Quebec that should be up and running next year.
These efforts should begin to translate into improved earnings and cash flow for Goldcorp. Lower commodity prices have been weighing on profits for some time, as the company earned only $0.78 a share last year, down from a peak of $2.18 in 2011. Share net, though, stands a good chance of rebounding this year, and should surpass its 2011 high by the latter stages of the decade.
Meanwhile, capital spending will likely again exceed cash flow in 2014, but the company appears to have ample financial flexibility to pursue its growth agenda. Notably, long-term debt now accounts for less than 10% of total capital, quite low compared to its industry rivals. Moreover, assuming commodity prices don’t deteriorate too much, cash flow should rise at least as fast as production, and exceed capital spending within the next year or two.
Overall, Goldcorp stock looks to be a worthwhile selection for investors seeking to add some exposure to gold. Shareholder returns also get a boost from a healthy stream of income. Notably, Goldcorp pays a dividend each month, and the current payout represents a yield of 2.1%, slightly above the median for dividend-paying stocks in the Value Line universe. Given an elevated payout ratio, nearly 80% of net income in 2013, the distribution may well be stuck at its current level for another year or more, but further hikes seem likely before we reach the 2017-2019 timeframe.