No less a sage than Warren Buffett has taught us to be greedy
when others are fearful and vice-versa. That's true for almost any
stock. But it's particularly good advice for commodities
A retailer like
or a consumer products vendor such as
might be able to deliver consistent growth year after year. But raw
materials such as copper, coal and platinum are different -- they
are susceptible to boom-and-bust cycles.
If you invest during the height of the boom, then you know
what's coming next.
It's pretty simple, really. Whenever acommodity price starts to
soar, more people are anxious to dig it up. New miners enter the
game, while existing ones pour cash into expansion projects to ramp
up their output. Before long, everybody and their cousin are
bringing in new supplies and glutting themarket .
When that happens, prices inevitably begin to fall. When they
get low enough, financial incentive disappears and producers decide
it's no longer worth it. Mines begin to close. New projects are
delayed or cancelled. In time, the supply surplus thins and turns
into adeficit -- causing prices to reverse course and move
Prices for this key industrial building block have plunged amid the
deteriorating economic picture. But today is irrelevant -- tomorrow
is what counts.
Incidentally, this is exactly what we saw in the natural gas
market. For example, I told readers of my
Scarcity & Real Wealth
Chesapeake Energy (NYSE:
had voluntarily suspended 1 billion cubic feet of gas production
per day, and that others had followed with their own curtailments.
Meanwhile, the lack of incentive has forced energy producers to
abandon most dry-gas fields and funnel their leasing and drilling
budgets into oilier plays. Natural gas prices have already
responded by rebounding about 45% off their lows.
This repetitious cycle has played out over and over again. But
identifying those inflection points when the pendulum is about to
turn is tricky, if not impossible. So the surest strategy is to
invest in companies like
Silver Standard (Nasdaq:
, an established miner sitting on 189 million ounces of proved
silver reserves,.when nobody else wants them. Last September,
anyone with $2.36 billion to spare could have bought the company.
Thatenterprise value (essentiallymarket cap minus cash) equates to
a cost of about $12.48 per ounce. The math works out the same on a
But investors aren't quite as upbeat these days, and small
mining stocks have retreated sharply.Shares of Silver Standard have
fallen to $12 from $32, slashing the enterprise value to $815
million. This means the firm's silver hoard is now priced at just
$4.30 per ounce.
Nothing has changed from an operating standpoint. The company is
exactly the same as it was almost a year ago. Well, that's not
entirely true. Operating costs have fallen, soprofit margins are a
bit wider now. So it's just a matter of waiting for the next up
Songwriter Tom Petty said it best -- the waiting is the hardest
part. But if you want to put some really big gainers in the win
column, then you must be willing to be patient and withstand a
barrage of discouraging news.
BHP Billiton (NYSE:
is a textbook example.
In the summer of 2002, things didn't look good for the
Australianconglomerate . Annual revenue for the year ended June 30
had just dropped to $17.8 billion from $19.0 billion a year
earlier. Commodity prices had weakened for the firm's aluminum,
copper, nickel, chrome, diamonds, silver, oil and zinc. And
shipmentvolume was falling for everything from coal to titanium,
reflecting the soft globaleconomy .
If that weren't enough, the company was also hit with hundreds
of millions inimpairment charges for discontinued operations. And
to add insult to injury, corporate tax rates for energy producers
in the U.K. were raised to 40% from 30%, hitting thebottom line
Management was candid. The outlook section of theannual report
began with this sentence: "There is cause for concern about the
The day that report was released, BHP Billiton could be had for
less than $8 per share. But rather than focus on the issues of the
day, it would have been far more constructive for investors to
weigh the cheap stock price against the long-term potential. BHP
Billiton is one of the world's largest metals and energy empires
and had dozens of growth projects under construction.
In the end, value always shines through. As you can see from the
chart below, BHP began rallying shortly after and went on to
deliver a 625% return by the end of 2007.
Again, this is exactly why it pays to seek out quality
stocks that are overlooked and underappreciated.
Risks to Consider:
I canguarantee you that many of the same investors who were
buying the stock enthusiastically back in September are dumping it
today. There's just too much risk, they say.
Apparently, $12 silver is a sure bet, but $4 silver
I'm not sure I understand that logic. Letting some air out of
the stock makes it safer, not riskier. Would you rather fall from
32 feet or 12 feet? Yes, the world's economic prognosis has
dimmed, and Europe's debt crisis is a viable concern. But since
11 of the firm's 12 mines are still under construction and won't
be open for a few years anyway, who cares about today's
Action to Take -->
Nobody likes to put their hard-earned money on the line when stocks
are sinking and the headlines look bleak. But ask yourself this:
has Silver Standard's merchandise been damaged? Nope. It's still
safely tucked away in the ground.
But thanks to anemicjobs growth , tepid retail sales, weak
manufacturing surveys and other dour economic signs, investors can
get their hands on that silver for a third of the price they would
have paid six months ago. That tradeoff seems perfectly acceptable
to me -- I bought 100 shares of Silver Standard for my
Scarcity & Real Wealth
real-money portfolio not long ago.
-- Nathan Slaughter
P.S. -- Although he is an expert in the area, oil and gas is far
from the only arena Nathan is profiting from. Scarcity & Real
Wealth aims to profit from the rarest and most valuable assets on
the planet -- precious metals, agricultural commodities, energy,
and other natural resources. These critical inputs are in short
supply, yet worldwide demand is on the rise, making these assets
some of the best investments on Earth. You can learn about one
important supply/demand imbalance Nathan has found that will be
making headlines next year by visiting this link (and without
having to watch a lengthy video).
Nathan Slaughter does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of KO, CHK in one or more if its "real money"
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