More interested in wearing gold than in investing in the yellow stuff? You're not alone. Gold-affiliated stocks are far less popular than those that represent other sectors. However, the metal's popularity has soared recently with its price climbing as high as $2,067 per ounce in August -- and even more so with the market's steep sell-off on Thursday. Even longtime skeptics, like the Oracle of Omaha himself, Warren Buffett, have taken a recent interest in gold. And if the world's greatest investor is willing to take the metal more seriously, maybe you should as well.
For investors willing to broaden their investing horizons -- or to increase their existing exposure -- there are several opportunities which are worthy options this month: Barrick Gold (NYSE: GOLD), Kirkland Lake (NYSE: KL), and the VanEck Vectors Gold Miners ETF (NYSEMKT: GDX).
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1. Barrick Gold
While Barrick Gold, the second-largest publicly traded gold mining company by market cap, gained popularity last month when news broke that Berkshire Hathaway had built a position in the company totaling nearly $564 million, it's hardly the only reason why Barrick is a lustrous opportunity right now. The company recently turned in strong second-quarter earnings. Reporting gold production of 1.15 million ounces in Q2, Barrick remains on track to achieve its old 2020 production guidance of approximately 4.8 million ounces.
In terms of its financials, the soaring price of gold helped Barrick generate considerable cash flow in Q2. Operating cash flow rose 138% year over year to $1.03 billion, and free cash flow skyrocketed to $522 million, an 849% increase over what it reported during the same period in 2019. Management's prudent capital allocation provides another reason why Barrick should glitter brightly in investors' eyes. Shoring up its balance sheet, Barrick reduced its total debt by 11%.
Looking toward the future, Barrick made progress on several projects despite the challenges of COVID-19, such as the expansion of Pueblo Viejo in the Dominican Republic and the development of the Goldrush project at Cortez in Nevada. The successful development of these organic growth projects helps to ensure that the company replenishes its gold reserves without the need to acquire assets.
Lastly, Barrick's attention to rewarding shareholders will appeal to dividend-minded investors. In the second quarter, Barrick raised its quarterly distribution 14% to $0.08 per share. With the latest increase, Barrick has more than doubled its distribution since its merger with Randgold two years ago.
2. Kirkland Lake
Operating assets in Canada and Australia, Kirkland Lake is a company that excels at generating strong cash flow, representing another glittering option for investors mining the market for gold stocks. Due in large part to the acquisition of Detour Lake earlier this year, Kirkland Lake has generated $418 million in free cash flow through the first half of 2020, and it sees a strong back half of the year as operations ramp up at Macassa.
Often, investors (myself included) who are familiar with mining companies will place greater emphasis on a company's cash flow generation over its earnings per share, since the latter metric can be "massaged" through the manipulation of non-cash charges. It's not only the fact that Kirkland Lake succeeds at turning the gold into green -- something not every gold mining company can do -- it's the fact that the company excels at it compared to its peers as measured by market cap Agnico Eagle Mines (NYSE: AEM), Anglogold Ashanti (NYSE: AU), Kinross Gold (NYSE: KGC), and Gold Fields (NYSE: GFI).
It's not only Kirkland Lake's alluring cash flow statement that will attract investors; the company also has an impressively strong balance sheet that features a cash position of $537 million and no debt.
Trading at 12.4 times operating cash flow, Kirkland Lake may seem pricey considering its five-year-average multiple is 10.1. However, choosing to eschew the stock right now due to the slight premium at which it's currently trading is a bit of "wisdom" about as valuable as fool's gold.
3. VanEck Vectors Gold Miners ETF
For investors interested in adding gold to their portfolios but who find themselves at the conservative end of the investing spectrum, picking up shares of an exchange traded fund, or ETF, like VanEck Vectors Gold Miners ETF is a solid gold choice. Offering exposure to a diverse range of 53 businesses, from senior mining companies like Barrick and Newmont Mining to junior mining companies, the ETF gives investors the ability to mitigate the risk of investing in a single company. While the ETF's past performance is no guarantee of how it will fare in the future, it's worth noting that over the past five years the VanEck Vectors Gold Miners ETF has risen 203%, outpacing the 72% rise in the price of gold.
With total net assets of $17.9 billion, the ETF has a modest net expense ratio of 0.53%, and it makes distributions on an annual basis. While its 2020 distribution hasn't been announced yet, in 2019 the ETF paid a dividend of $0.1905 per share, representing a yield of 0.45%.
Get a lode of these gold stocks
With the market's recent volatility and geopolitical uncertainty remaining at the forefront of investors' minds, it's no wonder that gold stocks are currently the object of many investors' desires. For those who find themselves most cautious about taking on risk, the VanEck Vectors Gold Miners ETF is a good choice. Those who are more tolerant of risk would be well-suited to consider Kirkland Lake, a company that outshines its peers in its cash flow generation, while Barrick Gold will appeal to investors who are both circumspect about risk yet willing to invest in a single stock as opposed to an ETF.
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Scott Levine has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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