Whilst the stock market at large continues to struggle, resources stocks continue to march higher…just like we predicted they would.
The
With the price of gold, oil, coal and platinum all around record highs, we think the our portfolio of small resources stocks is uniquely placed to profit.
Dear Concerned Stock Market Investor,
We’ve said it before and we’ll say it again…we firmly believe the resources boom will last for decades ahead. We view resources as strategic assets and with many large developing countries industrialising, such resources will be in demand regardless of market conditions, regardless of the
A little further down we highlight one smaller gold company and one smaller platinum company, both of whom we think are uniquely placed to prosper from their higher commodity prices and their outstanding exploration prospects.
But first, as usual, there are plenty of things to be worried about…
· The state of the
· Australian interest rates up to 7% and set to rise even further – are we set up for a housing slump, like the US and UK?
· Ricky Ponting’s batting form – when will he stop edging the ball to slip?
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· Commodity prices – can they sustain today’s historically high levels, and rise even further, as they’ve done in the past few days and weeks?
· The stock market – was January 22nd 2008 the bottom and shares are set to sail higher in the month and years ahead, or is there more pain ahead?
· BHP Billiton’s bid for Rio Tinto – is BHP potentially over-paying, what will happen to the
The list could go on.
They are all legitimate concerns, and each concern on its own might be enough to scare you out of making an investment in the stock market. But if you look at stock market investing as being a decades long experience, hopefully the picture looks a lot brighter.
War & Peace And The Economy Over The Next 30 Years
In the next 10, 20 and 30 years, the world’s economies will go through periods of recession and periods of growth. There will be war and there will be peace. There will be feast and there will be famine.
There will be flood and there will be drought. There will be house price booms and house price busts. There will be periods of stock market joy and periods of stock market despair. There might even be a period in which
If you thought about all that could happen in the ensuing years, you would likely never invest in the stock market. But you’d be missing the big picture, and missing out on some wonderful stock market profits.
Your job as a stock market investor is relatively simple. In fact, we’ve boiled it down to 7 simple steps. If you follow these 7 steps, we hope that in the years ahead, as you count your wealth accumulated from the stock market, you’ll have long forgotten about the sub-prime crisis, the US economic downturn, George Bush (both of them!) and January 22nd 2008.
Step 1 – Commit To Invest In The Stock Market
This is often the hardest step of them all. It is possible to lose money by investing in the stock market, and this very fact puts many people off taking the plunge. As we have said previously, psychologists tell us that the pain of loss is three times the joy of gain.
People are happy to avoid the pain of losses by not investing in the stock market…ever.
That is fine. But they are also missing out on the potential gains available by investing in the stock market.
Over time, we firmly believe the stock market offers you a great opportunity to make money and build long-term wealth, ahead of all other asset classes, including property.
For example, take a look at some of the extraordinary profits people could have made by investing in these ordinary household names…
CSL – up over 4500%* since they floated in 1994.
ABC Learning – up more than 1700%* since they floated in 2001.
Woolworths – up over 1000%* since they floated in 1993.
BHP – up over 1000%* over the past 20 odd years.
Commonwealth Bank – up over 800%* since they floated in 1991.
(Prices taken on February 11th 2008; gains don’t include dividends.)
Ordinary people like you could have made extraordinary profits by investing in companies such as those mentioned above.
Step 2 – Commit To Invest In The Stock Market For At Least 5 Years
Investing with anything less than a 5 year time frame is closer to gambling than it is to investing.
In the short-term, the share price movements are determined much more by investor sentiment rather than the underlying prospects for the company.
Take a huge company like Newcrest Mining for example. The share price hit close to $40 early this year, only to slump below $32 just 5 trading days later. Could a company worth around $14.5 billion one day be worth around $11.5 billion a few days later?
We don’t think so.
Newmont Mining is just one example of how share prices can move rapidly in a very short space of time. But as a long-term investor, these sharp movements in share prices will ultimately likely prove to be relatively meaningless.
Over time, we expect the share price of a company like Newcrest Mining to march higher. We like the company so much that we recently re-recommended it as a BUY to our Members.
We also expect the stock market in general to march higher over time. Sure there will be periods of extreme volatility like we’ve seen this January, but over the long-term, stock market returns have proven to be excellent.
Commenting on the North American markets, Trapeze Asset Management recently said the following…
“Over any 20 year period stocks have always outperformed all other asset classes. Over any 15 year period stock outperformance drops to 93% (although it would also be 100% if you exclude the '30s depression); over any 10 year period, 89%; over any 5 year period, 74%; and, for any 1 year period, 70%.”
Need we say any more?
Step 3 – The Time To Buy Is Now
People often wonder when is the best time to invest in the stock market. For example, with so much uncertainty around the global economy right now, some people may think now is not a good time to invest.
However, history has shown that time in the market is more important to your returns than timing the market.
Using that argument, the time to buy shares is now. It is always now.
Adding to the “buy now” argument is the current uncertain economic environment.
Virtually without exception, all the great stock market investors have prospered because they have bought during times of pessimism.
The current mood of the stock market is one of caution. One tremble from Wall Street creates earthquakes on the Australian stock market.
As an aside, did you realise that for the month of January, the US Dow Jones Industrial Average fell 4.6% versus a fall of 11.3% for the Aussie All Ordinaries Index? Hardly seems fair does it, especially as it’s their economy that’s close to recession, not ours?!
But yet that pessimism creates buying opportunities. For example, we think the share prices of some of the Fat Prophets specially selected stocks are trading at what we consider to be a significant discount to their true value.
We have more on them, including the two stocks we think are uniquely placed to prosper, a little further down.
The time to buy shares is when they are cheap. The time to buy them is now.
Step 4 – Invest In Industries And Sectors That Will Out-Perform Over Time
Do you think now is a good time to invest in the typewriter industry?
If such a company existed today, we suspect its shares would be rather cheap. No-one else would be buying shares in typewriter companies, so in a contrarian way, that might make the company attractive.
So here we have a cheap company that is completely overlooked by the stock market. But would that company make for a great long-term investment? We suspect not.
If the future is not typewriters, what is it?
We think you get the picture.
Successful investing is about the big picture too.
That’s one of the reasons our team concentrates a lot of its collective intellectual brainpower to working out which industries are likely to prosper in the months, years and decades ahead.
And we firmly believe it’s the resources sector that will prosper in the future, particularly oil and gold. We view resources as strategic assets and with many large developing countries industrialising, such resources will be in demand regardless of market conditions.
Not only that, as you’ll see a little further down, we believe our view is backed up and verified by the charts we’ve produced for you below. But as ever, we’ll leave it to you come to your own conclusions.
Step 5 – Buy Outstanding Companies With Excellent Management
There are many poor companies quoted on the Australian Stock Exchange. They destroy shareholder value, whilst often at the same time enriching the executives who are charged with running them.
HIH Insurance
One-Tel
Centro Properties
MFS
You have probably heard of these high-profile companies. The first two have long gone bust, with executives spending some time in jail for their part in the collapse. The latter two are in the process of a fire sale of assets in an attempt to ensure they live to fight another day. All four have destroyed a significant amount of shareholder value, if not all of it.
Outstanding companies grow. They have smart management who are of the highest integrity. They have strong competitive positions. They operate in sectors and industries with favourable long-term economics and prospects.
Woolworths
BHP Billiton
QBE Insurance
Oxiana
The difference is clear to see. The long-term shareholder returns are suitably impressive. We rest our case.
Needless to say, we place management experience, expertise and integrity right at the very heart of our stock picking process. We try to meet as many directors as we can so that first hand, we can assess their qualities.
We believe it’s that sort of attention to detail that sets the our service apart and has lead us to our market-beating stock recommendations over the 7 or more years of our existence.
Step 6 – Focus On Buying Smaller Companies
There is clear evidence that smaller companies tend to out-perform larger companies. We call it the small company advantage.
The rule of large numbers says large companies like simply can’t grow at the rates of smaller companies. Woolworths are in the process of fining this out now. Over the past 5 years, their sales have grown from $20 billion to over $40 billion. Barring a massive acquisition, sales are not going to double again over the next 5 years.
When it comes to mining companies, if Rio Tinto or BHP discovered a new uranium deposit, the rule of large numbers says that is not going to dramatically and instantly affect the share price.
But, when it comes to smaller companies, things are different. A new discovery or improved production or a new product line can instantly do wonders to the share price.
Also, over time, smaller companies can grow to be larger companies. For example, a company worth $10 million can grow into a company worth $100 million, and all else being equal, the share price would rise by 1000%!
Finally, smaller companies are generally over-looked and under-researched, allowing us here at Fat Prophets to find companies with outstanding prospects, yet valued at a fraction of the price of larger companies.
Amongst our current BUY recommendations, we have several smaller companies, including one oil explorer that is valued at just $10 million. Over the long-term, we think it and our other smaller companies could offer investors outstanding returns.
Step 7 – Invest In Times Of Pessimism
We’ve touched on this previously.
Just as it is logical that the price of an asset increases as demand increases, the opposite is also true.
So indiscriminately buying uranium stocks when they are hot and just because everyone else is buying them is a strategy unlikely to lead to long-term investing success.
Conversely, buying gold back in 2001, when the gold price was US$262 an ounce, and everyone else was selling, including The Bank Of England, was an excellent investing decision.
The good news for potential stock market investors is that now is a time of pessimism. Australian interest rates are high and heading higher. The
That is the exact environment that creates times of pessimism and therefore attractive prices for specially selected stocks.
Seven Steps To Stock Market Success
In summary, our 7 steps to stock market success are…
1. Commit To Invest In The Stock Market
2. Commit To Invest In The Stock Market For At Least 5 Years
3. The Time To Buy Is Now
4. Invest In Industries And Sectors That Will Out-Perform Over Time
5. Buy Outstanding Companies With Excellent Management
6. Focus On Buying Smaller Companies
7. Invest In Times Of Pessimism
Sounds easy.
Reality is different. For example, the current stock market continues to be finely balanced between a bull and bear market trend. Right now, the bulls are winning.
However, before becoming overly sanguine about recent market action, you should be aware that this could well be a bear market rally. Such rallies serve to lure investors back into the market, thinking the worst is over.
So Is The Time To Buy?
Based on step 3 above, the answer is yes – the time to buy is always now.
But are you buying now?
We suspect not.
We suspect many people may be waiting for the stock market to hit rock bottom before hitting the buy button. They are nervous because they are fearful of losing money.
Trying to buy at the absolute bottom of the market is a futile exercise – you’ll end up either never buying or buying back after the share market has more than bounced back. It’s this type of behaviour that sees many inexperienced private investors sell low and buy high.
May The Resources Sector Be With You…
Despite the threat of markets falling further, it is clear that the underlying makeup of the market suggests the strength lies with the resource sector.
But we’ve been saying that for a long time now…
At a time when the broader stock market remains on a knife-edge, both the energy and materials sectors remain well above their August 2007 lows, suggesting the bull market in the resource sector remains intact.
Maintaining our exposure to the sector has been our strategy for some time and we continue to advocate such a stance.
Whilst Avoiding The Banks…
Compare that to the widely held financial sector, a sector that includes the ever-popular banks.
The banking sector is under pressure, and investors are rightly concerned of the impact of higher interest rates on an already indebted household sector.
Over to the US, and we see the Federal Reserve Bank is hardly too concerned about inflation, with official interest rates in the
Lower interest rates and the Bush government’s emergency relief package continue to undermine the long term health of the US dollar.
Whilst this is not great for American tourists, it’s great news for gold, because gold is the US dollar’s major competitor.
Gold, Oil, Coal and Platinum All Surge Higher
In fact, last Friday gold prices surged US$12.30 to US$922.30 an ounce, close to an all time record high.
Gold has not been the only commodity on the rise. Just this week platinum for April delivery surged to a record US$1,949 an ounce. Coal is trading at record highs, and according to a report last week on the ABC, “the price of Australian coal is set to double as demand from
Oil jumped decisively above US$90 a barrel early this week, trading over US$93 a barrel. The US$100 a barrel mark is well and truly within sight again.
As regular readers will know, we have been keen on the energy sector for quite some time now. We’ve backed up our confidence by recommending our Members buy some of our specially selected resource stocks.
Despite all the good news surrounding the sector, including higher commodity prices, an increasing acceptance that Chinese demand is not going to fall off a cliff if the US economy goes into recession, and the prospect of further takeover activity especially in the mid-cap sector, the share prices of many mining and resources companies are still a long way off their 2007 highs.
The Small Company With One Million Ounces Of Gold
Take this Brazilian gold miner. Last week, we reiterated our BUY recommendation to our Members.
We initially recommended the company as a buy way back in November 2006 when the shares were just 33 cents. They have subsequently hit a high of 93 cents last year, but now trade back around the 83 cents level.
· The total company is worth only around $125 million. As we mentioned previously, smaller companies generally have the potential to provide investors with stronger upside potential.
· We particularly like the quality of the company’s project portfolio, its experienced management team and its promise of rapid exploration and evaluation of its portfolio.
· We have had the opportunity to visit the company’s Brazilian operations and came away impressed with progress, and having met the company in the last couple of weeks, are comfortable that they are on track for first gold by March 2008, now just a few weeks away.
· Whilst the company is rightly focusing on bringing its Brazilian operation into production, once that is done it is planning to quickly move forward with development work on two other exciting projects, one in
· The
The market often fails to fully appreciate many of the better quality junior mining companies in their initial stages. This ignorance can present buying opportunities for astute investors. We think this junior gold miner is a prime example.
We concluded our report to Members with “It is our strong belief that this company has the funding, projects and management team in place to be a success…We reiterate our view that it has the potential to be a long-term success story for our Members.”
Is This Platinum Explorer A Prime Takeover Target?
Then there’s the South African platinum explorer whose share price hit an all time high of $2.90 at the end of December. Despite the price of platinum continuing to hit all time highs, the share price trades around the $2.55 level, some 12% off its recent peak.
In a recent report to our Members, we said that in the coming months we believe the share price has the potential to break above $2.90 again and to extend to all time highs.
We concluded that report by saying the company “…continues to represent a rare, high quality investment opportunity for Members. It boasts two extremely attractive emerging South African platinum projects at a time of record prices. This is sure to sustain investor interest…which could result in a takeover or merger at some stage in the future.”
With many experts suggesting the market is over-sold and headed for a bounce, we urge you to act now in order to access our current recommended stocks and our very special subscription offer.
We wish you happy and profitable long-term investing.
P.P.P.S. Don’t just take our word for it regarding now being a great time to buy shares. Wilson Asset management principal Geoff Wilson was quoted in last weekend’s Australian Financial Review as saying “It appears some incredible value is presenting itself, with companies trading at a sizeable discount to assets. The mis-pricing of assets really seems to have started.”
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