See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Jubak's Journal Recent articles: • Rising interest rates go global, 2/10/2006 • 5 energy stocks for a smooth ride, 2/8/2006 • Why OPEC won't turn off the oil, 2/7/2006 More... | Jubak's Journal Why gold stocks should go higher So far in February, gold stocks are down about 12%. That gives investors a chance to get in before the next move up. By Jim Jubak Thanks, we needed that. I'm breathing a sigh of relief at the sell-off in energy and gold stocks. In the last few weeks, enthusiasm for the two sectors had risen to such a level that I couldn't find anybody with anything bad to say about these stocks. Everyone wanted to buy. And, frankly, that had me worried. I feel much better now that volatile small-cap oil-and-gas producer Ultra Petroleum And now that gold stocks Newmont Mining No, I'm not some kind of investing masochist. I personally own shares of Glamis Gold and Gold Corp., and I don't like the pain of an 11% loss any more than the next investor does.
Bring on the unconverted But the simple truth is that stocks go up when doubting investors are converted into buyers. If everyone is a believer, there isn't a reservoir of potential buyers ready to increase demand for shares. You make more money investing in the trend when at least a sizeable minority of investors doubts the trend -- or worries that it's about to come to an end -- and resists buying into the trend even while other investors are making money. As long as the fundamental trend is intact -- and I believe it is in the energy and gold sectors -- I'm happy to see signs of skepticism. And I get positively giddy when I see a story like "Commodity bubble's burst is good for stocks" from The Street.com. Related news and commentary on MSN Money
Bring me your worriers, your doubters, your shorts with a need to cover. In today's column, I'm going to take a look at the trend ahead for gold stocks. Next column, I'll do the same for the energy sector. And in the third part of the series, I'll look at why the technology sector is having such a hard time putting a strong upward trend together. The clich says that bull markets climb a wall of worry. And like many clichs, this one became a clich because it is so true. Let's take a look at the gold sector to see how it works for a sector that's trending upwards.
Golds good for jewelry but a terrible investment right now. One ETF has engorged the market with investors, and the price is unlikely to rise much higher. Click here to read Middletons perspective on gold. Back in October 2000, you could have bought shares of gold-industry leader Newmont Mining for $13 a share. Thanks to a round trip that had taken the stock from $15 in 1983 to $60 in 1994 and then back to $15 in 2000, volume had dried up. In 1990, for example, the stock traded less than 200,000 shares on most days, and a big spike in trading would take daily volume up to 700,000 or 800,000 shares. (You can set our charting tool to show trading volume in the bottom frame of any stock chart.) That's a miniscule volume of trading for a stock like Newmont Mining, with 84.5 million shares outstanding in 1990. Volume had picked up by the time 1998 rolled around, with 1 million to 2 million shares often trading daily. Volume spiked after the August bottom, as 4 million-share days became frequent and spikes took volume close to 6 million shares a day. All that buying turned out to be premature, as earnings per share cratered in 1998, falling to 44 cents a share from $1.14 in 1997. The rally based on this higher volume petered out after the stock hit $30 in October 1998, and the stock began its descent toward the October 2000 lows near $13 a share. This kind of misleading volume signal in 1998 is why I like to combine technical and fundamental analysis. At some point, the buyers buying on volume momentum have to give way to buyers buying on earnings momentum. Otherwise a stock's rally will stall. A huge drop in earnings at Newmont Mining in 1999 and 2000 scuppered this handoff and led to the stock's retreat. As the stock rallied in 2001 -- finishing the year at $19 and change -- volume picked up, but it certainly didn't skyrocket. And the fundamentals were so strong that investors couldn't ignore this stock: Earnings had rebounded from a 6 cents-per-share loss in 2000 to a profit of 8 cents in 2001. But sales were still stagnant -- a trend, or lack of one, that would persist through 2002. Why the gold bulls will win By 2005 sales and earnings per share were up and -- best of all for investors riding the upward trend in Newmont -- trading volume was climbing along with the stock's price. You know the joke about stocks: They're the only thing people want to buy more of as the price goes up. Well, that was exactly the case with Newmont. By February 2006, average daily volume had risen to 7.5 million shares and the stock had hit a high of $63 a share. But these two trends -- higher prices and heavier volume -- had hit a critical patch in December 2005. When gold broke $500 an ounce that month, two things happened.
And that's just the physical supply-and-demand story. The world's investors are putting gold back into their asset-allocation mix. You can track the effect in the growth of exchange-traded funds (ETFs) that specialize in gold. The first fund, StreetTRACKS Gold But the drop in February gold prices swings the battle between these two opinions even more toward the gold bulls' position. The drop in price takes the sting out of the "gold hits historic highs" camp and the argument that gold is too high. Instead, for those who have noticed the returns reaped by investors in gold in 2005, the drop creates a buying opportunity. Investors itching to get into the sector but hesitating because of gold's price now have the perfect "reason" to buy. Wall Street doubles down You can even find this logic reflected in the opinions of Wall Street analysts. In any drop like the one gold has suffered recently, investors should check out Wall Street's reaction. If analysts react to a decline in the prices of the stock they cover by cutting target prices and slashing recommendations to hold (almost no one ever says "sell") from buy, it puts more downward pressure on stocks already tumbling in price. (This is classic "Close the barn door after the horse has run away" logic.) If, on the other hand, analysts use the drop as an occasion to raise targets and recommendations, it proves that they believe they see this drop as a chance to make money for clients. And, of course, by recommending that clients buy these shares, they increase buying volume, pushing up prices and generating exactly the effect they predicted. Examples:
I can't say how long any gold-sector decline will run -- the price of gold on a daily basis is set by speculation on such imponderables as whether the Japanese will buy more or less gold as their economy recovers. But the turn in the gold sector will come. When it does, the move up will be strongly fueled by the big build-up in short positions in the sector. (In a short position, a trader sells borrowed shares of a stock, betting the stock will go down in price and that he'll be able to buy shares at a lower price to replace those he borrowed.) According to Prudential Equity Group, in January, investors added $183 million in Newmont Mining to their existing short positions (total $1.2 billion), $470 million to existing short positions in Barrick Gold New developments on past columns Stocks for the 2006 commodities crunch: It's hard to imagine how earnings growth of 140% could cause disappointed investors to sell your shares, but that's exactly what happened to Grant Prideco Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Glamis Gold, Gold Corp. and Grant Prideco. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.