The Time To Buy Is Now

As interest rates edge up yet again, many people must be wondering if now is the right time to be buying shares.

The simple answer is yes.

With the share prices of some of specially selected stocks trading at what we consider to be a significant discount to their true value, the time to buy is now.

Dear Stock Market Investor,

The Australian stock market is on the move again.

Since its January 22 low, the All Ordinaries Index is UP around 13%, including a massive 185 point or 3.2% jump last Friday alone.

Was January 22 2008 the bottom of the current market?

We don’t profess to be able to predict the short-term direction of the stock market. We don’t know anyone else who can either, despite there being no shortage of ‘experts’ willing to give it a try.

Is it too late to buy now?

No way.

The time to buy is now. It is always now.

But…there is a catch.

It’s only time to buy THE RIGHT STOCKS now.

A little further down we’ll give you details of some of the stocks we are finding attractive now, but first a little background…

China’s $15 Billion Resources Investment

“We have a very bullish view of the long-term prospects of the global mining sector.”

Those words come from Chinalco president Xiao Yaqing in London last week as he unveiled his company and its US partner Alcoa’s $15.5 billion massive CASH investment in Rio Tinto.

Chinalco and Alcoa now jointly own a 12% stake in Rio Tinto’s London shares.

The deal is significant for several reasons.

Most obviously it scuppers BHP Billiton’s three-for-one all share takeover offer for Rio Tinto. BHP were likely anyway to have to increase their offer anyway, but this significantly increases the amount BHP will have to pay in order to secure its prey.

We will know more this week about BHP’s response, possibly even by the time you read this email.

We’re happy to let BHP and Rio and Chinalco and Alcoa and their myriad of highly paid bankers, lawyers and advisors sort out it all out.

Needless to say, as regular readers of this email will know, we’ve long been fans of Rio Tinto and particularly BHP, and this deal simply endorses our bullish long-term views.

As an aside, with BHP shares now trading around $40, Members who acted on our special buy alert email and bought BHP Billiton shares at the $31* they traded at just 2 weeks ago will already be sitting on a nice 29%* profit. And we think that is just the beginning.

The Resources Boom That Just Keeps Getting Bigger

As for Rio Tinto, last week we said we believe they remain in a position of strength, and along with other large diversified miners, will continue to be a major beneficiary of the ongoing global commodities boom.

We’re not alone in thinking this resources boom is only just beginning.

Last year, prominent investor Marc Faber was quoted on Bloomberg as saying, “the up wave of the (current commodities) cycle is likely to last another 15 to 20 years”.

So just another 14 or 19 years to go then…

Four Big Bets On The Resources Boom

Since that quote, we’ve had four of the biggest bets yet to back up the view that the resources boom is set to continue for years ahead…

Bet #1

Last year, at APEC, Woodside Petroleum announced the largest export deal in Australian history. It will sell up to $45 billion in liquefied natural gas (LNG) to China's leading energy producer, PetroChina.

To put that into perspective, trade between China and Australia was $50 billion for all of last year, making China Australia's largest trading partner, ahead of Japan and the USA.

At the time, Gordon Kwan, head of China energy research at CLSA called it "…the mother of all LNG deals.”

Bet #2

BHP’s $350 billion takeover offer for Rio Tinto. If ever you needed proof that mining companies believe in the longevity of the resources boom, surely that was it.

Bet #3

The $15.5 billion cash paid by Chinalco and Alcoa’s for a 12% stake in Rio Tinto’s London shares.

What is also highly significant is that the consortium paid a large premium for their stake in Rio. When Rio’s London shares closed last Thursday at £50, Chinalco and Alcoa paid £60 per share for their stake, a 20% premium to the prevailing share price.

Do you think they believe in the “stronger for longer” resources argument?

Bet #4

Mrs Beryl Gray of Wagga Wagga put $1000 of BHP Billiton shares into a trust fund she set up for her newly born grand daughter.

The trust fund cannot be accessed until her grand daughter is 21 years old, and at that time, Mrs Gray hopes it could pay for a new car, be used towards a deposit on a first house, or be used to fund further education costs.

Mrs Gray thinks BHP is a safe investment and is a company that will survive and prosper over the next 21 years. She hopes the power of compounding returns, including dividends, will ensure her grand daughter is presented with a decent sized cheque in 2029.

The Share Market Offers The Best Returns

We have a confession. We made the last bet up.

But, we wouldn’t be surprised if similar scenarios haven’t been regularly played out around the country.

The point of course is that over the course of such a long time period, the share market usually offers the best returns. Also, because it is such a long-term investment, you want to invest in large, stable and growing companies.

Like the theoretical Mrs Gray, we think BHP Billiton fits the bill.

Over $550 Billion Of Resources Bets

Those first three bets above are well and truly for real.

There are many more examples of bets being made in the resources sector. In fact, every day resources companies around Australia are effectively making bets on the longevity of the resources boom.

As just reported in the Australian Financial Review, according to Access Economics there are already around $200 billion of mining projects already committed or under construction.

As if that’s not enough, a further $178 billion of possible projects are now pending, AND another $175 billion worth are under consideration.

It all adds up to an Australian mining project pipeline totalling over $550 billion.

Insatiable Chinese Demand Continues To Fuel Resources Boom

Either this is the greatest resources bubble of all time or the insatiable demand from China, the increasing demand from India, plus the usual consumption from huge economies like the USA, Japan, Germany and the rest of Europe will continue to fuel this resources boom.

We clearly think it’s the latter.

Many so-called experts have continually under-estimated the length and breadth of this resources boom. That’s fine by us, as it means the share prices of some of our specially selected stocks are trading at what we consider to be a significant discount to their true value.

Most successful stock market investors usually go against the crowd.

Most successful stock market investors are value investors.

Even though mining and resources stocks seem like they’ve been flavour of the day for a while now, we firmly believe the best is yet to come. Once the stock market at large cottons onto the longevity of this resources boom, we think it’s inevitable the valuations of many of our specially selected resources stocks will soar.

A Very Good Environment For Long-Term Investors

For example, even with the shares trading at around $40, BHP trades on a 2009 forward price earnings ratio of about 10.5. That is the equivalent to an earnings yield of 9.5%, and for a rapidly growing company with favourable underlying economics, we think is just plain cheap.

But you’ve known that for a while now…

We’re not the only ones who think leading mining companies are cheap. When asked by the weekend Australian Financial Review about the prospects of the leading mining companies, Australian Foundation Investment Co chief executive Ross Barker said…

“Their cash flows are fantastic and it’s a very good environment for long-term investors because you have people concerned about resources and China and they sell quality companies down, and that is where you can pick up some good buys.”

We couldn’t agree more, as evidenced by the special buy alert email we sent out to our Fat Prophets Members at the height of the stock market meltdown of 2 weeks ago.

We went on to name SIX high quality resource companies, all of which had seen their share prices hammered over the previous week or more. In tune with the rest of the stock market, all have risen smartly since we sent out that email.

Yet all SIX remain some way off their record highs, and despite the share price rises of last week, we remain confident about their long-term prospects.

Searching For More Great Small Companies

We are value investors. We don’t just search for cheap companies. We search for cheap companies with excellent management, outstanding assets and sustainable competitive advantages.

Although we like the share price and the future prospects of huge companies like BHP Billiton and Rio Tinto, we generally focus on smaller companies.

These smaller companies are generally over-looked and under-researched, allowing us to find companies with outstanding prospects, yet valued at a fraction of the price of larger companies.

Some of our very best recommendations have been smaller companies.

For example, each of these companies was initially recommended when they were worth less than $30 million. Just look at the stunning gains they’ve racked up since…

Carnarvon Petroleum – Up an amazing 919%* in just under 2 years!

Terramin Australia – Up a breathtaking 577%* in just a little over 2 years!

Image Resources – Up an astonishing 341%* also in just a little over than 2 years!

(Share prices taken on Monday 5th February 2008. Gains don’t include dividends.)

It’s Likely An Excellent Time To Be Buying Shares

That sort of performance is no fluke. It is the result of years of experience, plenty of skill, hundreds of hours of research, and a complete dedication to selecting and profiting from stock market winners.

When it comes to the mining and resources sector, we have a long and enviable track record.

Now obviously our portfolios have fallen over the past month or so in tune with the rest of the stock market. The market is taking no prisoners.

The share prices of some of our very favourite resources and mining stocks have been beaten back.

But that has created some compelling buying opportunities. Like many other stock market experts, we believe around now is likely to be an excellent time to be buying shares.

Exceptional Opportunities

For example, Wilson Asset Management principal Geoff Wilson was quoted in the weekend Australian Financial Review as saying some “exceptional” opportunities have presented themselves, particularly in the mid-to-small company sector.

“I am more excited about the next 12 months than I have been in the last two or three years.”

It never ceases to amaze us when stock market investors head for the exit when prices are cheaper than they were just a few weeks or months ago.

Particularly disturbing to us was another article in the weekend Australian Financial Review which talked of younger investors, who have invested in the stock market and never experienced a significant downturn, looking to switch out of stocks and into property.

We’re not going to get into a debate here and now about house prices, suffice to say in the past we’ve said we think there is a greater risk of Australian house prices falling in the future than rising. More on that in future editions…

It’s About China, Stupid

A few short weeks ago, people were happy to pile into shares.

China was growing at a double digit annualised rate, placing it on track to surpass Germany as the world’s third-largest economy.

We were predicting the commodity boom would last for years to come.

The Australian stock market was regularly hitting new highs.

Fast forward to now…

China is still growing.

We are still predicting the commodity boom will last for years to come.

World stock markets have wobbled and shares have become cheaper.

Can you spot the difference?

Obviously shares are now cheaper than they were a couple of months ago.

In any normal market, you would expect demand to increase when prices were lowered. Only in the stock market does demand decrease when prices go lower.

Why Stock Market Investors Are Idiots

It defies belief.

It’s idiotic…crazy…absurd…imbecilic…insane…foolish...(insert your own objective here…)

Yet it happens time and time again.

That’s because, in the short-term, the direction of the stock market is driven by the twin emotions of fear and greed.

To be a successful investor, you have to be able to control your emotions, concentrate on the long-term picture, and follow master investor Warren Buffett’s timeless advice…

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

You May Have To Be Quick To Snap Up These Bargains

The good news coming out of the recent stockmarket shenanigans is that we’re finding many of our existing share recommendations trading at even more attractive prices.

But you may have to move quickly, as the share prices have already made some significant moves, although they are mostly still some way off their recent peaks.

For example, take a look at the share price falls of some of these mining & resources stocks…

This emerging gold producer’s share price – about which just last week we told our Members “…is a dirt cheap gold exposure” – is around 39% lower than it was in November 2007, and a whopping 63% off its June 2007 high.

This small oil producer and explorer – who very recently announced record oil revenues and an aggressive oil and gas development programme – has seen its share price plunge around 23% in just over 3 months, despite the shares being up around 17% in the last 2 weeks.

The uranium producer – which remains our standout uranium share pick – has seen its share price tumble over 40% lower in just the last three months. Sure it has had some short-term problems as it ramps up production at its new mine, but we believe these are only temporary. It seems the stock market may also be starting to believe this too, judging by the 8% share price jump on Monday this week.

Our Newest Uranium Stock Continues To Out-Perform

Of course, not all companies have seen their share price decimated over the past few weeks.

Those companies that continue to perform well continue to be rewarded with rising share prices…just the way it should be!

When it comes to junior mining and resource companies, good news on the exploration front is still being rewarded for quality issues.

Take the Namibian uranium explorer we told you about a few weeks ago.

As a reminder…

· We remain extremely bullish on the uranium sector, yet at the same time, we stay away from the purely speculative “boom or bust” end of the market.

· Despite there being dozens upon dozens of uranium hopefuls listed on the Australian Stock Exchange, we have so far recommended only four.

· To emphasise the sort of research we undertake before recommending our Members buy a stock, last year we undertook a site visit to our newest uranium stock’s project in Namibia.

· We genuinely believe that this company has the potential to discover a world-class uranium deposit.

This Company Has Just Made A Massive Uranium Discovery

Last week, things got really interesting for this Namibian uranium miner when it firstly announced to the stock exchange news of a “massive uranium intersection” at its Namibian exploration target.

Soon after, in another stock exchange release, it announced a further “major new uranium discovery.”

Given the success of the latest drilling programme, we are extremely confident that an initial resource estimate, due in the next few weeks, could be in the vicinity of 30-40 million pounds of uranium, with the potential to surprise on the upside.

In our latest report to Members sent last week, we concluded by saying “We reiterate that this is merely just the beginning with respect to this company.”

Not surprisingly, the share price took off in response to these latest massive new uranium discoveries.

Yet the company is still only relatively small, with the whole company still valued at less than $250 million. Compare that to uranium producer Paladin Energy which is valued at well over $3 billion.

The Only Way For Gold Is Up

As regular readers will know, our target gold price for 2008 is US$1100 an ounce. The precious metal is progressing steadily on its inexorable journey towards the US$1,000 per ounce mark.

The financial market panic associated with a struggling US economy has set the scene for gold's next assault on the summit. With major production issues, albeit temporary in nature, emerging in South Africa and China, and more US interest rate cuts to come, the only way is up for gold.

Gold finished 2007 with its biggest yearly gain since 1979, its sixth straight annual increase, and it has taken this positive momentum into the New Year.

The gold price hit an all-time high during the first few days of 2008, with an impressive burst through the US$850 per ounce mark, and it has continued to climb higher despite the carnage on world financial markets, climbing to a fresh record of US$929.80 an ounce just last week.

We are seeing a simultaneous decline in global gold production at a time of increasing demand and record gold prices. However, there are enormous supply-side restrictions affecting gold.

This supports the strong long-term gold price outlook that we have held and maintained for years.

Three 3 Ways To Profit From The Soaring Gold Price

Given our confidence in the gold price, as you can imagine our portfolios are packed with gold exploration and production companies.

Here is a flavour of just three of our favourite gold stocks…

1. The Egyptian gold miner with over 11 million ounces of gold reserves.

2. The West Australian company whose corporate goal is “To produce 1 million ounces of gold per annum and have reserves of 10 million ounces by the end of 2010.”

3. The Argentinean gold explorer about which we recently said is “one of the world’s most exciting emerging gold players.”

We reiterate that 2008 should be another stellar year for the yellow metal. Gold has so much going for it, with a quartet of high profile factors comprising high oil prices, a slumping US dollar, economic uncertainty and the risk of inflation.

Accordingly, we continue to recommend that Members maintain strong exposure to gold during 2008

We wish you happy and profitable long-term investing.

P.S. As long-term investors ourselves, we’d be delighted if you would join us in our journey to bring you wealth creating stock recommendations. As we have previously said, we think the resources boom is only just beginning, and if it does run for the next 15-20 years, based on our past track record, we are very confident of continuing to thump the returns of the overall stock market.

P.P.S. Remember the tiny Mexican gold, silver, copper, lead, zinc and molybdenum explorer we told you about a couple of weeks ago? Despite the company recently announcing that drilling in Mexico is progressing well, with results indicative of elevated levels of gold and silver, the share price still remains around the level it was way back in June last year. This is the same company about whom we concluded our initial BUY recommendation by saying “…we believe there is very little downside for Members, but rather, for patient investors, there is potential for tremendous upside over the longer term.”