Mining Stocks for 2018

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The Bingham Canyon Mine in Utah, USA

The following is a list of a few mining stocks to consider coming into 2018. Some investors are eyeing mining stocks as an unappreciated sector in the past few years, and are looking to diversify their portfolio from overpriced stocks to some bargains. I have reallocated some gains from 2017 into the first option below in anticipation for a gold price increase to follow the recent commodity price increases.  Please comment below if you have any other suggestions.

  1. Barrick Gold (Nasdaq: ABX)  – the largest gold mining company in the world.  With a PE Ratio (TTM) of only 7.00 trading at $14.00 this is a steal. The dividend is weak though, so the hope would be that the gold price rises or they can cut expenses and improve efficiency. This would probably be one of your best bets on gold prices. With the US dollar starting to decline against other currencies and commodity prices starting to rise this stock is essentially a bet on gold. The expected output of gold in 2017 is 5.3 million ounces and the expected output of copper is 420 million pounds. The size of the company means it is more likely to be able to weather an extended gold price trough. Another positive is that this company has not issued more shares for the past few years, meaning they are less likely to dilute the price. The drawback to this company is that is heavily dependant on gold and copper mining, so more or less betting on these two commodities. Today’s price is $14.00.
  2. GoldCorp (Nasdaq: GG) – another Canadian company, GoldCorp is essentially a smaller version of Barrick with a higher pricetag. GoldCorp estimates to mine 2.5 million ounces of gold in 2017 but claims to have plans to grow by 20% by 2021. If you want to invest in gold miners and want to spread across multiple companies, you can consider buying some of this stock. Today’s price is $13.22.
  3. BHP Billiton Limited (Nasdaq: BHP) – The world’s largest mining company. We aren’t talking gold – we are talking coal, iron, copper, potash, and petroleum. This company currently has a “average” P/E (TTM) ratio of 19, but boasts and excellent dividend of 1.72 or 4.1%. Today’s price is $42.30. Investing in this company is sort of like investing in the global economy, as the raw materials are used around the world. This company was hit by the economic slowdown of 2008, falling to $36, but then peaked in 2013 at over $94 per share. From 2011 to the end of 2015 the shares slowly slipped down to $22 per share but have since risen to their current price of $42.29.

 

 

Set Your Target and Be Happy with a Profit

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I purchased Twenty-First Century Fox (FOXA) for $26.77 near the end of September and sold it for just $29.00 yesterday. I could easily be upset about this sell, after all Fox is now trading at $31.15 with the news of Comcast’s supposed interest in purchasing a large stake of the company. Just last week Fox was in talks to sell some of its assets to Disney, so two potential suitors means a better price for Fox.

The reason I had to sell the shares I had for just $29.00 was because I had written a call option when I purchased they shares for exactly $29.00 per share with expiration date of November 17th. I figured an 8% gain within two months was a pretty good rate of return should I be forced to sell. My reason for buying FOX was due to it having a low P/E ratio and dividend, followed by the facts that it had fallen quite a bit from $32 per share in March. Having a profit margin about 10% and a return on average equity of over 20% this was a good candidate amongst other large media companies. Not to mention the “economic moat” that Fox has from its news competitors.

Writing the options yielded 64 cents per share, meaning the shares would have to exceed $29.64 for me to have to sell the stocks. The doubly whammy good news for Fox meant I had to sell the shares at a measly 10.7% profit  [($29.00 + $0.64) / $26.77] rather than a 16% profit [$31.15 / $26.77]. My conclusion is that I would have no idea of these pending acquisition talks, as I base my investment decisions usually on book value and economic moat evaluation. The option drove the stock sale, and now my liquidity is up.

It is easy to regret investments which could have made you more money. I regret not buying a whole bunch of bitcoin in 2011. However, instead as a investor you should be confident if your decisions are well informed and logical.

Is Freelancer full of Scammers?

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Freelancer.com is advertised as a place to have content written for you, or software developed, etc. You can have someone write articles on your topic of choice, or even have bids for mobile apps you have ideas for.

I recently joined Freelancer and hired someone to write something for me.  I paid them about 20 USD to do a financial analysis piece on Kroger’s stock price after it had crashed 30.6% after two sets of bad news on July 15th and 16th. On the 15th Kroger’s management came out with some low expectations due to price cuts and competition from other grocery stores. On the 16th Kroger was hit with news that Amazon was buying Whole Foods. You can imagine the implications this move will have for the entire industry if it parallels the book market or retail sales market in the US. Take Borders and Sears as prime examples, Borders was bankrupted by Amazon and Sears is closing stores around the country in a death spiral towards bankruptcy. Basically what I wanted written is a current evaluation of Kroger as of it’s price drop and a valuation of the company as it stands now. What I got instead was a bunch of words which looked like they were written in a foreign language and freshly presented after a Google Translation!

Below are a few bits from this “native English speaker from England”:

  • The supermarket chain has direct subsidiaries, convenience stores, Jewellery stores, and online retails platform for their customers
  • The prices of groceries have broken the 60 years longest streak by a decline for straight 17 months
  • The discounts offering at Kroger are highly competitive of all its rivals which make it most favorable

In short, the entire article was a piece of trash. I’d rather have a Nigerian prince write my articles for me. A waste of $20, and proof that Freelancers are not who they say they are. This particular Freelancer had over 60 five-star reviews, most likely fake users.

Another story I have, one which thankfully didn’t cost me money, was when I put out a bid for a mobile game app. About 50 bids came back in with various quoted prices. When I contacted some of these bidders, they switched their price from around $300 to $5,000. When I said I’ll think about it, they come back with the standard line “What is your budget”? With swindlers like these I would not trust them to develop an app exclusively for me and not steal it for themselves afterwards. Again, if you think you can outsource work cheaply and turn a profit it’s probably time to look somewhere else besides Freelancer.com.

If anyone using Freelancer has had a good experience with content writing or having apps developed, let me know. For now I’ll avoid them like the plague and maintain thehighestreturn.com as a single author source for information. Once I have more time I’ll do my own mobile apps as well.

 

Trump Stocks VS Hillary Stocks

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At this point it’s safe to say that unless something extraordinary happens either we will get a Donald Trump or Hillary Clinton presidency. While I could spend volumes discussing the economic implications of either win, at this point its more important to figure out what companies will benefit or lose from each presidency so you can take a gamble or get out before its too late.

Coal/Oil

Its safe to say that fossil fuel companies would continue to get hammered under a Clinton presidency. If Clinton is anything like Obama, we should see a few more coal stocks go bankrupt like Peabody Energy (Formerly PBU) and Arch Coal (Formerly ACI). Surviving coal companies include Cloud Peak Energy (NYSE:CLD), Westmoreland Coal Company (NASDAQ:WLB), and Alliance Resource Partners, L.P. (NASDAQ:ARLP). Oil companies face regulatory difficulties under a Clinton presidency, but most should be able to survive as oil maintains current price levels. The coal industry in my opinion is a bad investment at this time due to the very cheap price of steel and the lower demand from China and the United States.

Defense

One area that will most likely benefit from a Trump presidency is the defense manufacturing companies. Companies which would produce items for the military and navy include General Dynamics (NYSE:GD), BAE Systems PLC (LON: BA), and and array of other companies. You can also invest in Mutual Funds iShares Dow Jones US Aerospace & Def (ITA) or Fidelity® Select Defense & Aerospace Portfolio (FSDAX). Over the past year ITA has returned 18% and FSDAX has yielded 14%.

Healthcare

While I’m tempted to say the healthcare industry would continue well under a Democratic president, I can’t say for sure given the very cutthroat price increases which have made them a popular industry to attack from both Democrats and Republicans. If the Democrats end up further building up Obamacare it’s quite likely the pharmaceutical industry will be volatile. The TPP agreement pushed by Obama and Clinton will make people in 3rd world countries have to pay more for medicine, which may end up furthering profits in this sector. Time will tell. I’m not going to put any recommendations here.

Gold / Silver

If you’re a gold or silver investor, then the past year has been very kind to you. Especially if you’re into gold and silver mining stocks. Helca Mining company (NYSE:HL) surged 215% YTD and almost 200% in the past year, from under $2 to $6. Barrick Gold Corporation (NYSE:ABX), Goldcorp Inc. (NYSE:GG), and Silver Wheaton Corp. (NYSE:SLW) are all big players in this market. This is one of my favorite industries to make huge profits from moderate changes in base precious metal prices. It’s hard for me to say which candidate will cause these to go up further, it’s more dependant on the Federal Reserve interest rate policy and inflation. However based on the campaign talk It seems like a Clinton presidency would be better for precious metals. It’s always a good idea to have these as part of your portfolio to some degree.

Real Estate

Donald Trump made most of his money off of real estate – it’s always good to include this in your mix of assets. As the world population expands real estate will most likely continue to climb regardless of who makes president. A recession could certainly hit prices, but only temporarily.

Conclusion

I’d get out of coal, first of all. I’d put money into defense stocks as they should outperform the market under either presidency. I’d allocate some money into precious metal if only for an insurance policy on the dollar. I’d get some cash out of this frothy market and wait for the market to tumble before the election before strategically investing in under-priced high return on equity stocks.

Beware of Overpriced Stocks

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Today Netflix crashed 13% after lower than expected subscribers were reported for the second quarter. It now trades at $85.63 after falling $13.13. If you had invested in this stock just yesterday you would have lost over 13%. The first thing I do when I see stock headlines like this is pull up the stock and look at it’s P/E ratio. This is currently at an outstanding 266! That’s more than 20 times that of Apple, meaning people have much higher expectations of growth with this stock.

That being said, 266 is better than a P/E of 0 (sometimes denoted ‘-‘), which means that the company does not turn a profit at all. One big example of such a company is Tesla. People are so adamant that Tesla will be the wave of the future that they’ve heavily invested in this stock, which means that Tesla will probably have a high beta. When fluctuations happen you will see these high beta stocks swing much more violently than stable low risk stocks such as Proctor and Gamble, Johnson and Johnson, and utilities. That being said, certain events can still cause ‘stable’ companies to flop or gain/lose an incredible amount of value – buyouts, disasters, shortages are some of these types of events.

In my opinion, I would not consider buying any company with a P/E ratio higher than 100, and would discourage investing in an unprofitable company. If I had to use a stock screener to automatically buy stocks I suppose I would filter by P/E ratio between 10 and 22 with a dividend of between 1 and 3.5% and a return on equity of at least 10%. Return on equity means how much percentage profit each stock generates. For example Apple has in the first quarter had a return on average equity of over 30%, meaning if each dollar of stock generated 30 cents in profits. Not bad! A low return on equity means the profitability of the company based on its equity is low, so more money put into the company might not yield much profit so the incentive for price growth or dividend payouts is probably lower.

 

You Are Forced To Invest in Risky Assets

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Mortgage rates history

Bank CD Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Take a good hard look at the charts above. While mortgage and CD rates were over 10% in the mid 1980’s, mortgage rates have dropped to between 3 and 4 % starting in the 2010’s and the bank interest rates have fallen to around 0.1%. The problem with the current investment environment today is that there really is no where to get a great return except for higher risk assets. Stocks and bonds both carry risks, and have been heavily pumped up due to the lack of alternatives such as existed in the past. Central banks have been pushing people with assets to invest in the stock market for quite some time now, as such investments ostensibly drive economic growth and also people’s retirement accounts.

Retirement accounts in the US are not the same as they were  in the past – in 1980 the 401k accounts were started by private companies take take advantage of section 135(a) of the Revenue Act of 1978. This became a trend among companies across the US and is now the standard. Companies would much rather have individuals put money into their 401k than be obligated to support them after retirement. The 401k is a type of defined contribution plan rather than a defined benefit plan. Federal law does not require employers to offer or to continue to offer a plan, but most white collar jobs do come with this benefit.

The IRS dictates that 401k beneficiaries being distributions at a certain age. The rules are a bit different for designated beneficiaries, but they should be closely followed otherwise penalties will be imposed. If an employee decides not to invest in a 401k, he or she does not receive any taxable benefits offered by the 401k which could either be:

  1. Untaxed deferrals to the 401k plan
  2. Untaxed gains for the Roth 401k plan

In short, money that goes into the normal 401k plan is not taxed up front but instead when removed from the account. Money that goes into the Roth 401k is already taxed but doesn’t get taxed when removed. Entire industries are supported on fees and administration costs related to people’s 401k accounts – if you haven’t yet, you should check out how much money you are charged for keeping money invested in each mutual fund, bond, ETF, etc. you are holding. Deciding to put your 401k money in fixed income will yield you close to nothing, but having money invested in international funds generally is more risky.

Unfortunately for the saver of today, the best investments tend to be stocks or real estate. Gone are the days of investing in bank CDs, at least in the US. If you’re looking overseas many countries still have double digit interest rates you can get on savings, but those countries tend to have higher inflation too.  Keep in mind holding a foreign bank account you will need to report your assets with the IRS using the FBAR form.

cd rate

 

 

Strategic De-Vesting

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My last post noted how investing during a stock market trough is a wise decision. Many financial advisers will never advise their clients to reduce exposure to the stock market, but given the current price valuations I suggest selling off some stocks to hold gold, silver, or practical real estate. The reason for this is clear – the stock market has had a great ride, but that ride is based on a handicap of low interest rates and valuations which exceed standard price/earning ratios of the past. Amazon has a P/E ratio of 300, Tesla has a P/E ratio of nothing because they don’t even turn a profit! Apple holds a pretty low P/E ratio of around 11 because of doubts on future profitability.

The point is, there is a frothiness to the US stock market which is alarming. In my opinion it would be best to sell of around 30% of your portfolio now and ensure your investments are in stable asset classes. I’ve mentioned investing in water almost almost one year ago, and here are the results (using 1 year return from today):

GE : up 22% (Current price $32.21)

ECL : up 6% ($119.10)

AWK: up 62.95% ($82.76)

WTS: up 21.47% ($61.05)

I would keep these water stocks except for ECL and sell high risk assets such as Tesla, Amazon, etc. to ride out the upcoming correction.

If you check out my post on how investing in the stock market is like a chess game you should note that my recommendation on gold/silver stocks has also paid off.

The particular company I linked in that post has gone up 151% and is now trading at 6.05. I suggest selling this stock at this time to retain the profits.

 

So in summary my suggestion:

Hold on to the water stocks

Cash out and perhaps put money into modest real estate

 

Capitalizing on People’s Fears

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The stock market has lost about 10% of it’s value in 2016 so far. Consider this a 10% discount from what it was before 2016, however timing the discount is nearly impossible. One thing’s for certain, buying a stock now would be better than buying that same stock 19 days ago. One way to ensure you’re getting a discount regardless of how low the market goes is to dollar-cost-average. If you’ve already lost a it in the stock market this year, then most likely your instinct is telling you to sell before it reaches 2008 crash levels. If it does recede further this might be a correct strategy, however very few major news organizations will tell you this. The 2008 crash erased about 50% of stock market value between late 2007 and early 2009, so we still have 40% to go if the crash gets that bad.

One commodity that almost always seems to prosper when stock markets crash is gold. Gold and treasuries. One investment that often gets hit after the stock market is real estate. However, real estate value decline isn’t usually permanent unless you’re talking about a city which becomes deserted like Detroit. You can also make money off of real estate by renting it out – assuming there are renters interested in your location. Other alternatives for the timid include putting the money in a CD, which unless you are holding it for 10 years will give you a measly return less than inflation in many cases. Other uses for money include education, donations, or simply burning to keep the house warm.

My suggestion is to dollar cost average a return to the market, and keep an eye out for severely undervalued investments in the next few weeks or months as the market crashes. If you have investments in relatively unharmed stocks, it might not hurt to sell those and use the money and buy the stocks which will recover the most.

Investing in Water

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One aspect of investing that some people consider when they decide where they put there money is helping mankind. That could be in the form of a simple donation or investing with companies that help mankind develop. One area that needs investment that will forever be necessary is water transportation and desalination. Water scarcity is one of the largest risks to economies around the world, as populations continue to grow and glaciers and fresh water sources continue to diminish. I visited Lake mead less than two months ago and it currently sits at the lowest level since Hoover dam filled up this artificial lake in the 1930’s, its clear to me that civilizations across the world cannot continue to rely on traditional reservoirs and a certain amount of precipitation to divert emergency. As we have done with oil infrastructure, the same will eventually have to be done with water – desalination and purification of ocean water and pumping that water across lands to irrigate and placate populations.

The biggest players in that type of game can definitely change if the need escalates, but currently we have a list of the following companies who are related to supplying water infrastructure or desalination services:

  • General Electric (GE)
  • Ecolab (ECL)
  • American Water Works (AWK)
  • Watts Water Technologies (WTS)

This is a short list, but in summary General Electric has worked on desalination plants and will definitely be a player to come in this field. Ecolab is involved in water purification technologies. America Water Works is more of a utility company that provides water service and waste water treatment (another vital component of sustainable water infrastructure). Watts Water technology helps provide water quality solutions – in layman’s terms it creates plumbing pieces that help buildings smoothly move water around. Feel free to view each company’s website for more details.

These types of investments can be a form of macro trend investing – investing in technology which is up and coming and required for a sustainable future. As folks have witnessed in recent history investments into coal and dirty energy have proved very unprofitable, and that is based on standards governments have been setting which have resulted in fewer coal powerplants and slower growth in the demand for crude oil as car efficiency goes up and electric car sales increase. Water is a resource that everyone needs – which can be conserved but will need more supply soon!

 

The Stock Market Vs a Chess Game

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The stock market is in some ways much like a chess game – prices of stocks usually are priced based on future expectations. In other words the folks at multi-billion dollar hedge funds have done the math, and have tried to play a long ways into the future. This can be said about the price of stocks, and the price of stock derivatives. The biggest reason why the stock market has been falling in recent weeks is due to the expectation that the Federal Reserve is going to raise interest rates – a low jobless claim rate cause stocks to sink faster because it increases the chances that the Federal Reserve will in fact raise rates to stave off inflation. By doing so, stocks are no longer as good of an investment relatively speaking compared to cash – stocks have risk and cash has little risk, so to increase interest rates means you can get more return for a no risk investment.

However, since the stock market looks to the future there is a very real possibility that stocks will have taken into account a Federal Reserve interest rate increase before the increase happens – and if the increase is lower than expected you should see the stock market start to jump back up due to its factoring error.

That being said, investors should still reassess the forward price earnings ratios of their stocks to make sure they aren’t holding on to something that is too expensive. Speculators will still hold onto company stocks which they see as having lots of potential even though they are priced very high. You can see that in companies like Tesla, where a company that doesn’t have a P/E ratio because it isn’t profitable yet still boasts a good stock price. On the other hand, a company like AFLAC has a very low P/E ratio of 10 because I suppose investors don’t see AFLAC coming up with the new invention of the century. Apple is priced at a moderately cheap price of around 15, as investors are weary that Apple may have had its day in the sun and won’t come out with any new revolutionary products since legend Steve Jobs has left.

My suggestion then is to sell off your expensive stocks and as the market drops incrementally buy back in as prices because attractive. As an insurance policy against the Federal Reserve deciding not to raise interest rates I suggest buying some precious metal company stock, and companies that will do well under higher interest rates include banks such as Bank of America. I want you to be the one who yells Checkmate before your portfolio yells it to you!

Please make sure to read my disclaimer below before taking any action.