Portfolio Update: New Additions and Subtractions (October 13, 2015)

photo-operations-Sabodala-pit

I’ve made a few new transactions over these past few months, so I thought I would give readers an update on the overall status of my portfolio.

For starters, I’m still holding majority cash, as I continue to make a conscious effort to boost up the reserves as much as I possibly can on any given month. In my mind, I still believe that the most wonderful buying opportunities will slowly present themselves in the near future, perhaps over the next 1-2 years.

Meanwhile, I’ve continued my stance of holding 0% equities, as I have sold out of all stock positions and emptied out my Roth IRA and 401k accounts. Currently, the only stocks that I hold are gold/silver mining shares, which I guess are still technically classified as equities, but I would put them in a different group since these holdings generally don’t correlate with the movement of the broader overall market.

Subtractions

Recently, I sold out of my position in Alibaba (BABA), in addition to some other positions, as outlined below:

Transactions

Let’s not mince words — Losing money sucks!

Losing a good chunk of capital hurts even more… So, why did I sell out?

As I mentioned in a previous update, I still think that shares of BABA will do very well over the next few years, and perhaps decade. It’s a great Buy and Hold stock that has a lot of upside at current valuations.

Unfortunately, I had to part ways with this holding as I just found so much more value contained within gold and silver mining stocks (otherwise I would have had no problem holding onto BABA for the long-term). But frankly, right now, I’m not looking for any Buy and Hold opportunities; I only want deep value discounts, or I’m not buying! The decision to liquidate my entire position in BABA wasn’t easy, but I wouldn’t say it was entirely difficult either.

Yes, taking realized losses wasn’t part of the original game plan, per se, but as readers have probably figured out by now, I’m not particularly gun shy about selling.

I loathe missing out on wonderful investment opportunities more than anything else!

I don’t fall in love with my investments and I have no problems saying goodbye when I find better opportunities. In this case, that’s exactly what happened.

So, we’re just going to have to move on… Tax-loss harvesting occurred earlier this year than normal! 😉

The same deal applied to liquidating out of Walmart (WMT) and Kinder Morgan (KMI), although those positions were much smaller and I did manage to hold them long enough to qualify for one dividend distribution. Woot!

Additions

I’m continuing to establish my gold and silver mining portfolio. Over the past month, I’ve added the following positions:

Current, as of October 13, 2015:

Screen Shot 2015-10-13 at 4.28.41 PM

I’m putting my money where my mouth is! Dalradian Resources (DNA.TO), First Mining Finance (through GCU.V arbitrage), Pilot Gold (PLG.TO), and True Gold Mining (TGM.V) were recently featured in my “Best Junior Mining Stocks” article. Teranga Gold (TGZ.TO) was a “runner up” but a company I still very much wanted to add to my portfolio. Rubicon Minerals (RBY) has had some issues lately, but if those get resolved swiftly, I may add more shares at a later date. Lastly, Pretium Resources (PVG) is still on my radar, but I am holding out for a better entry point (shares have been soaring and are overbought at the moment).

The overall portfolio is fast approaching $100,000. Not exactly what I had in mind when I first started buying shares, but the more I learn about the industry, the more convinced I am that this window of opportunity that is currently open is perhaps one that only comes around “once in a lifetime“.

Well, maybe once every decade or so, but you get the idea…

Loading up on ANY investment at, or near the bottom is usually the toughest thing for investors to do… But as I’ve learned, it’s also the most lucrative time to start loading up. Since I’ve already been around the block (purchasing shares of the S&P 500 at 2009 lows and Bay Area real estate in 2012), I’m quite comfortable and familiar with the old adage of “being greedy when others are fearful“. The window of opportunity open right now for gold and silver mining stocks is absolutely no different, and perhaps an even better deal.

This might be the best buying opportunity that I’ve ever come across in my entire life!

The HUI to Gold Ratio is at an all-time, historic low:

Screen Shot 2015-10-13 at 4.09.36 PM

Gold mining stocks, relative to the spot price of gold, have NEVER been this cheap before!

When I was buying up Bay Area real estate back in 2012, I thought that valuations were ridiculously low… When I stop and analyze gold and silver mining stocks today, I’m seeing even steeper discounts. These valuations are so absurd right now, that I don’t even bother to waste my time trying to comprehend them anymore. Instead, I’m taking the “buy now, ask questions later” approach.

Here’s an example of my most recent purchase, Teranga Gold (TGZ.TO). I purchased 10,000 shares today for C$0.58/share.

Screen Shot 2015-10-13 at 3.32.06 PM

Teranga Gold is a mid-tier gold producing company that owns and operates the Sabodala Gold Mine is Senegal, which is located in West Africa. Since Teranga is NOT a junior exploration company, we can actually analyze this company using conventional valuation metrics.

Most stock investors, such as dividend growth investors, are all too comfortable analyzing a stock’s fundamentals.

With TGZ.TO, we have the following:

Trailing P/E of 4.38

Forward P/E of 9.50

PEG (5 year) of 1.06

Price/Book of 0.39

Enterprise Value/EBITDA of 1.42

Outside of gold and silver mining stocks, I’m guessing that there are very few sectors out there at this time where an investor/speculator can find such absurd valuations…

Let’s look at the balance sheet:

Screen Shot 2015-10-13 at 3.32.11 PM

You are reading that correctly. Teranga has ZERO debt and over C$38 million in the bank. Further, the company generates C$261.82 million in revenue (trailing twelve months).

The Book Value is C$1.48/share… But the stock is currently trading for ONLY C$0.57/share.

The market cap is ONLY C$201.10 million.

Does that make sense to anyone?

As legendary investor/mining expert Pierre Lassonde recently commented earlier this year:

“At times like this, I like to invest most of my money in companies that already have real assets. One example is Teranga Gold Corp. (TGZ:TSX; TGZ:ASX). Franco-Nevada has a royalty deal, so we did our due diligence and valued it at about $300 million ($300M) in 2013, which is slightly less than the total amount of money that’s been spent building the mill and mine, and it doesn’t even account for the reserve! Four months ago, the stock was $0.35/share for a company with a $100M market cap. It has a mine and mill producing 200,000 oz per year at fairly cheap costs, and the market was willing to let it go for $0.35/share. That’s the kind of crazy opportunities that are out there.”

 

As I’ve been emphasizing lately — Don’t chase the markets. Let the markets come to you.

Of course, it’s not to say that there are no risks associated with a stock like TGZ.TO. For one, Teranga operates in West Africa, so shares will always trade at a discount relative to a “safer” jurisdiction such as British Columbia, or Ontario.

Further, no one has a crystal ball and can predict where the price of gold will be next year, let alone tomorrow…

But as investors/speculators, we just do the best that we can with the information that we have available at our fingertips today. And right now, stocks like TGZ.TO are a dime-a-dozen!

Teranga Gold may very well be a great company, but in the world of gold and silver mining companies, almost the entirety of them are trading at the same, or similar deep discounts.

From Rick Rule:

“At the bottom part of the market, the valuations and the best stocks in the sector are so compelling that they ought to gap up 100%. The only reason that they don’t is that people’s expectations of the future are pegged to their experiences in the immediate past. People’s experiences in the immediate past have been so bad for the last three years that they don’t have the courage to buy companies that are selling at 50% discounts to working capital. There are companies on the exchange now where cash is selling for $0.50 on the dollar. 

Bear markets are the authors of bull markets. A market that has declined by 83% in nominal terms and 90% in real terms is 90% cheaper and 90% less risky than it was during a bull market. Bull markets follow bear markets, and you make money in markets by buying low and selling high. This is the opportunity to buy low.

 

Sure, these stocks could keep falling, and perhaps they still have another 20% or 30% or even 50% to go before they reach the bottom and declare final capitulation. Since it’s so difficult to time the exact bottom, I’m not going to bother to try; I know that we are close enough where I can start aggressively “backing the truck up“.

Please Note — Investing/speculating in gold and silver mining stocks are NOT suitable for every type of investor. I am NOT recommending anyone buy ANYTHING! These stocks are inherently volatile and thus RISKY. Speculate at your own risk! These stocks are NOT Buy and Hold investments! ONLY gamble with capital you can afford to lose.

If we were to compare TGZ.TO to another more conventional stock, such as Johnson and Johnson (JNJ), this is what we would find:

Screen Shot 2015-10-13 at 3.31.45 PM

JNJ is a world-class stock, and almost every dividend growth investor out there either owns it, or has it on their watchlist.

I realize comparing TGZ.TO to JNJ is very much akin to comparing apples to oranges… But let’s just do a cursory glance using basic valuation metrics:

With JNJ, we have the following:

Trailing P/E of 16.82

Forward P/E of 14.91

PEG (5 year) of 3.13

Price/Book of 3.74

Enterprise Value/EBITDA of 10.62

Let’s look at the balance sheet:

Screen Shot 2015-10-13 at 3.31.59 PM

Summary of the two companies (TGZ.TO vs. JNJ):

Trailing P/E of 4.38; 16.82

Forward P/E of 9.50; 14.91

PEG (5 year) of 1.06; 3.13

Price/Book of 0.39; 3.74

Enterprise Value/EBITDA of 1.42; 10.62

Cash: C$33.37 million; $33.95 billion

Debt: $0; $19.31 billion

 

Again, these two companies operate in entirely different sectors, so a direct comparison is fruitless. Nevertheless, when you look at many of these mid-tier gold and silver producing companies using conventional valuation metrics, they do indeed pass the “first-glance” test (more due diligence and research is of course warranted after the initial screening). So much so, in fact, that I’ve had to scratch my head and ask, “What’s the catch?” on multiple occasions…

 

And that’s why I’ve been able to “back up the truck” with no fear. 🙂

 

Happy Investing/Speculating!

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mikew
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mikew

Sooo do you factor currency into your evaluation? What if the stock pops 10% in a year but the Canadian dollar also drops 10% that year. You broke even….

just saying. Do you have an alternative? What broker do you use to trade foreign equities?

mikew
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mikew

and the online broker you prefer?

John
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John

Are you bullish more on gold as an asset or on the mining companies?

Andrew
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I love the idea, but it is so hard to practice, very against the grain. I recently bought 120 shares of PAAS and will certainly consider more mining stocks moving forward. I would love to think we are at or near the end of the bear market in PM, it is just so hard to tell. Back in the early 2000s gold was 300-400 per ozt and had plenty of room to move higher. Another move even close to that would put the metal well above 2500 or better. What kind of returns are you expecting / hoping for here,… Read more »

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