Resource stocks are suddenly hot again, seemingly catching many people by surprise. But as regular readers will know, we’ve long been resource bulls, so no surprises here.
As you’ll see below, some of our very favourite small resource stocks have jumped sharply higher in a matter of days. Yet, they are still off their all time highs, leaving room for potentially even more quick gains.
Oh, and by the way, oil hit a new record over US$120 a barrel …
Dear Resourceful Stock Market Investor,
We’d like to start this week’s email with news of 4 significant events…
Significant Event #1 - OIL
Oil closed Monday at a new record high of over US$120 a barrel.
Significant Event #2 - GOLD
Gold jumped US$16 on Monday to US$874 an ounce, coming on top of the US$7 an ounce it added on Friday last week.
Significant Event #3 – OUT OF THE WOODS
Last week, the Australian Financial Review quoted EL&C Baillieu Stockbroking director Richard Morrow as saying “I think we’re out of the woods. Investors have lost the panic factor. Knee-jerk sales are stopping and people are looking for good return on investment ideas, especially in the safe sectors of the market such as mining, energy and infrastructure.”
Significant Event #4 – HUGE TAKEOVER
British energy giant BG Group (otherwise known as British Gas) last week bid a massive $13 billion for Origin Energy in what would be
Hot Resource Stocks
Resource stocks are hot again. Just take a look at the share price movements of some of these selected shares on just one day last week, Thursday May 1st 2008, and the movement from their 2008 share price lows…
Thursday From 2008 Low
Small Oil Producer/Explorer +14% +38%
Tiny South Australian Mineral Explorer+13% +46%
Bargain Priced Junior Copper Explorer +9% +55%
Specialist Mt Isa Copper Producer +9% +59%
(All prices taken from Yahoo Finance as at Monday 6th May 2008 close)
As you’ve probably guessed by now, all the companies highlighted above are companies we’ve previously highlighted as BUYS to our thousands of Members.
Obviously we don’t get every recommendation right, and the above companies are just a small selection of the over 100 stocks currently in our Reports.
But we think the table above succinctly highlights 2 pertinent investing points…
1. Share prices can move very quickly. Selling out to buy back in at a better price or sitting on the sidelines waiting for a better price can be expensive strategies.
2. If you had the skill, guts and luck to buy small resource stocks at or close to their low point in 2008, you could already be sitting on very substantial profits…but only if you bought the right stocks!
Best Stock Picker’s Market In Resources
Perpetual portfolio manager James Bruce was quoted in last week’s AFR as saying…
“Right now, I think this is the best stock picker’s market in resources that we’ve seen for quite some time.”
He also was quoted as saying…
“There are some outstanding opportunities in resources at the moment, but there are clearly some things that are overpriced as well.”
Although the share prices of all 5 companies mentioned above have jumped significantly, especially from their low points of 2008, they still remain below their all time highs.
Even after the recent share price excitement, given our long-term positive outlook for resource stocks, we still confidently think the best days for these 5 stocks may still be ahead of us.
The Resources Bandwagon Keeps On Rolling
As regular readers of this email will already know, we’ve been very keen on resources stocks for a long time now. We are not jumping on the resources bandwagon just because the share prices of selected resources stocks are rising.
Our exposure to natural resources remains steadfastly positive. The demand we have seen coming from
On top of that, as long as the world continues to be awash in US dollars, courtesy of the Federal Reserve’s interest rate slashing programme, we believe that demand for commodities (which are priced in dollars) can only continue.
In addition, although there is a tremendous amount of investment being thrown at the commodity supply side, it will take a long time for output to rise. There has been significant underinvestment in new mines, agriculture, energy and exploration for much of the past two decades which were characterised by low commodity prices and low investment.
But all that is changing.
Buffett May Be Wrong, But He’s Betting On A Rising Market
But what about the credit crunch?
But what about the
But what about the
But what about Australian interest rates?
But what about rising Australian inflation?
Is there a resources bubble?
Where to from here for the stock market?
If we knew the answer to all those questions, we’d be millionaires by now.
Even the great Warren Buffett, worth a cool US$60 odd billion, doesn’t know the answer to all those questions. Whilst on the one hand he thinks the
In other words, Buffett may be wrong.
But then again, Buffett firmly remains confident about the long-term prospects of the stock market. So confident in fact, that his company Berkshire Hathaway has a whopping US$6.2 billion potential liability should the
Buffett has been selling long-term equity put options on four major stock indices. These contracts come due between 2019 and 2028. Without getting into too much detail, basically Buffett books a profit of US$4.9 billion if these indices are higher than they were when he entered into the contract.
Here’s the really interesting part of the deal from Buffett and Berkshire Hathaway’s perspective – the company has already received the US$4.9 billion, money the company is free to invest today.
Shock: Buffett No Investing Mug
If the markets finish higher, Buffett and
We fancy Berkshire Hathaway’s odds of a big gain. Buffett is no mug. He knows over the long-term markets rise. As
“We believe that these contracts will prove profitable over the 15-20 year periods they cover, even if we exclude the investment income we can expect to earn on the $4.9 billion that we hold.”
Our Top Ten Stock Market Investing Tips
So, what does this all mean to mere mortals such as ourselves, ordinary people who can’t quite rustle together the odd US$5 billion to bet that the market rises in the next 15-20 years?
We defer, as usual, to our top ten stock market investing tips…
1. Buy the right shares.
2. Buy the right shares at the right time.
3. Buy the right shares at the right price.
4. Invest with a long-term perspective.
5. Accept that losses are part of stock market investing.
6. Don’t panic when all about are acting like propeller heads.
7. Buy shares when others are fearful.
8. Sell shares when others are greedy.
9. Sell the right shares at the right time.
10. Sell the right shares at the right price.
Picking the right shares is the obvious first step to making your stockmarket riches.
We have devised a proprietary stock picking formula which has served us rather well in the 7+ years of our existence.
· We search for value.
o We don’t just search for cheap companies. As we said previously, we search for cheap companies with excellent management, outstanding assets and sustainable competitive advantages.
· We identify companies that are able to out-perform.
o These are often found in smaller companies. 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.
· We search out unloved companies and sectors.
o We don’t follow the crowd. When others see doom and gloom, we search for opportunities, especially in the previously bombed-out but now hot again small company resources sector.
· We are investors, not traders.
o We look at the company and not the share price. Over the medium to long-term, if we identify the right companies at the right price, the share price will eventually track the underlying progress of the company, and our Members will hopefully be well rewarded.
Alcopops Up, Resources Up, Share Prices Down. Huh?
We’ve mentioned before about the fundamental disconnect between the performance of resources share prices compared to the record commodity prices.
The recent share price gains have gone some way to correcting that disconnect, but with the oil price at US$120 a barrel, and not every company’s share price running hot, we believe the disconnect still exists, and it still offers patient, rational, long-term investors tremendous buying opportunities.
Unlike alcopops…
Federal taxes on pre-mixed alcoholic drinks – alcopops – were recently increased without warning by 70% under a Rudd Government plan to tackle binge-drinking particularly among teenagers.
A visit to the local liquor store confirms the massive price rise. The price of alcopops have jumped significantly higher. As to whether this measure will curb teenage binge drinking, we somehow doubt it. If alcopops are now too expensive, we’re confident the crafty teenagers will find other, cheaper drinks, to quench their thirst.
As an aside, why doesn’t Nanny Rudd raise the taxes on cigarettes by 70% to tackle binge smoking? Could it have anything to do with more smokers being of voting age than the majority of alcopop drinking teenagers? Just a thought.
The point is that when the taxes on alcopops were increased by 70%, in response the price of the drinks also rose, instantly.
But it’s not happening like that with commodity prices versus resources stock prices.
Since October last year, the oil price has risen by around 45%.
Since October last year, the price of
Most broker valuations are done using oil and other commodity prices which are significantly less than the current prices.
The resources companies themselves are somewhat guilty of modelling their return on investment based on significantly lower commodity prices than those that currently prevail.
It’s a case of…
· I see the oil price is at US$120 a barrel, but I can’t believe it;
or
· I remember when oil was close to US$10 a barrel, and I can’t get that out of my mind;
or
· I am going to under-promise and over-deliver.
The Real Truth About The Future Oil Price
Despite the cautiousness, the truth doesn’t lie. NYMEX Crude Oil futures all the way out to December 2015 are priced at well over US$100 a barrel.
As we said a couple of weeks ago, we firmly believe US$100+ oil prices are here to stay.
Many resource sceptics believed that the sharp pullbacks in commodity prices a few weeks ago signalled the end of the resources bull market. In oil's case, bears were expecting a hasty retreat below the psychologically important US$100 a barrel mark.
Instead, just a few weeks on and oil has again hit fresh all-time highs, with prices reaching a record US$120 a barrel. In our view, triple-digit oil prices are here to stay.
As a reminder, we’re not the only ones who think this. As was recently reported in the AFR…
“Barclays Capital has put a rocket under its long-term oil price forecast, predicting the price of the black gold will average US$137 a barrel until 2015, up 44 per cent on its previous estimate made 18 months ago.”
Getting High On These Two Small Oil Stocks
A couple of weeks ago you may remember we highlighted two small oil stocks we thought were significantly under-valued.
You don’t?
In our most recent update to Members, we said this about one of the companies …
“When we last covered it we thought the company was a bargain-priced entry then, but over the past few months the story has advance significantly and become more attractive. In the meantime the company’s share price has halved, making the company extraordinary value in our opinion. When will the market wake up and smell the coffee, we ask?”
The share price is up almost 30% in the past month alone. It was one of the stocks we mentioned above, one that jumped 14% in one day alone just last week.
The other small oil company we highlighted is already the our best ever recommendation.
We first recommended the stock as a BUY back in February 2006. At the time, the share price was a lowly 5.4 cents and the total company was worth just $17 million.
For those of you not lucky enough to have bought at 5.4 cents, or at other share prices significantly below the 55 cents the shares traded at 2 weeks ago, you might be thinking you’ve missed the boat.
But rather than thinking investors have missed the boat, we think the best days for this company could still be ahead of it. In fact, so confident were we in this company’s future prospects, we recently upgraded the stock to a BUY.
Fast forward to today, and on Monday this week, the shares closed up another 6% on the day, and now trade at 69 cents. That’s an impressive 25% jump in just the last 2 weeks alone.
The Time To Buy Is Now
It just goes to show how quickly and decisively share prices can move. Sitting on the sidelines and waiting for…
· A better price;
or
· The next stock market crash
can be an expensive investing strategy.
If a share offers value at today’s prices, the time to buy it is now. That doesn’t mean the share price can’t or won’t go down, because share prices can move independently of the company’s underlying value.
But over the medium to long-term, if your investment thesis is right – great company available at a good price – then you should ultimately be rewarded with a rising share price.
With the share prices of some of our specially selected small resource companies running hot, some jumping as much as 19% in just one day, we urge you to act now in order to access our current recommended stocks.
We wish you happy and profitable long-term investing.
P.S. It’s not just us who think the
P.P.S. Legendary investor Warren Buffett said in a recent interview on CNBC said “…if we're going to use 85 million barrels a day now and the rest of the world probably is going to increase its demand in the next five or 10 years, we're going to have a tough time maintaining production that satisfies those at this price, even.” Sounds to us as if Buffett might be an oil price bull too.
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