Since mid March, the All Ordinaries Index has jumped an impressive 17%. We hope you’ve been along for the ride.
Resource stocks continue to lead the way…oil hits new record highs, gold hits US$900 an ounce again, and other key commodities also hit record highs.
Amidst the resource euphoria, we highlight two oil companies who’ve missed the party to date, plus two gold companies set to benefit from the rising oil price.
Dear Hot Stock Market Investor,
The stock market is hot again.
Or perhaps we should say the resources stock market is hot again. As Charlie Aitken of Southern Cross Equities was quoted in Monday’s Australian Financial Review (AFR) as saying “There’s a resources market and then there’s a market for industrials.”
We say buy selected energy stocks, particularly oil stocks, and buy selected resource stocks, particularly gold stocks.
But we’ve been saying that for a long time now. If you haven’t bought any resource stocks, you might be getting bored with our message by now.
But if you have bought resource stocks, you’d have been enjoying the stellar run many of these companies have had particularly over the last few weeks.
As you’ll see a little further down, we maintain our view that we are still in the early stages of this resources boom. The demand from
1. People's Republic of
2.
3.
By comparison to
In fact, if you add together the populations of
If you added
Putting all that into an investing equation, we get…
BHP Up, Oil Up, Gold Up, Resources Up
Last week, BHP Billiton hit an all time high of above $50.
On Friday in
Gold, the somewhat forgotten resource in the light of the ever-soaring oil price, broke through US$900 an ounce again.
As reported in the AFR this week, in addition to oil, last week global steel prices, iron ore, coking coal and thermal coal all moved to record highs, with copper being just off its record high.
Since its March 18th 2008 low point, the All Ordinaries Index has jumped a remarkable 17%. Even more impressively, BHP Billiton has soared around 40% over the same period. The strong Aussie stock market has been mostly about BHP Billiton.
But then regular readers of this email shouldn’t be too surprised about that. Not only have we regularly been telling you that the resources boom is here to stay, we’ve also been regularly telling you about our enthusiasm for BHP Billiton.
The One Stock You Should Have Bought
It all started a year ago almost to the day when our email titled “The One Stock To Buy Today” recommended investors buy BHP Billiton. Back then, the share price was around $31. Today it flirts with the $50 mark.
If BHP Billiton was in fact the only share in your portfolio, in a 12 month period during which we’ve witnessed almost unprecedented global stock market uncertainty, volatility, corrections, panic and fear, you’d be up around 60%! In the same time period, the All Ordinaries Index is down around 6%.
BHP Billiton is one of those rare stocks that remains cheap even as its share price soars. Such companies are absolute gems, worth their weight in gold, or iron ore, or copper, or uranium, coal, lead, gas, oil…
We are constantly looking for such companies to recommend as BUYS to our thousands of Members. If you pick the right ones, like our best ever recommendation, as you’ll see a little further down, they can seriously be wealth-changing events.
BHP’s performance is also rare in that 12 months ago it was already a huge company, and huge companies usually don’t see their share prices soar 60% in a year. That sort of performance is usually reserved for the smaller end of the market.
Which reminds us…although we’re ecstatic at the performance of BHP Billiton over the past 12 months, we usually concentrate on smaller companies.
Small Resource Companies Set To Join The Share Price Party
And right now, many smaller resource companies have missed some of the BHP Billiton-type share price party over the past 12 months. But that is changing.
Over the last couple of weeks we’ve highlighted the recent share price jumps of several stocks. As a reminder, take a look at the share prices of the 3 oil stocks we highlighted last week, updated to reflect another week of gains…
April 2008 Low Price Today Change
Small
Mid sized Thai producer/explorer $0.46 $0.76 UP 64%
Mid sized WA explorer/producer $1.54 $2.17 UP 41%
Yet looked at over the past 12 months, a period in which the oil price has pretty much doubled, and versus their all time share price highs, the story is a little different…
May 23rd 2007 Price Today All Time High
Small
Mid sized Thai producer/explorer $0.13 $0.76 $0.80
Mid sized WA explorer/producer $1.64 $2.17 $3.26
At the risk of boring you with share price tables, compare and contrast today’s share price with the initial BUY recommendation price and to that of BHP Billiton’s 60% share price rise in the last 12 months…
FP Initial Rec Price Today Change
Small
Mid sized Thai producer/explorer $0.054 $0.76 UP 1298%
Mid sized WA explorer/producer $2.72 $2.17 DOWN 20%
(All prices taken from Yahoo Finance as at Monday 19th May 2008 close)
One company obviously stands out – the mid-sized Thai oil producer and explorer is our best ever recommendation.
We mentioned above about how we are constantly searching for those gems of stock market companies that continue to look cheap even when the share price is soaring higher.
Our mid-sized Thai oil play is a perfect example of the nice things that can happen to your portfolio when all the stars line up perfectly.
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.
Fast forward to today, and the shares now trade at 75.5 cents. Members who bought at 5.4 cents would now be sitting on a massive gain of 1298%.
To put that into perspective, an investment of $20,000 made in February 2006 at a share price of 5.4 cents would now be worth a quite unbelievable $279,629.63.
For those people who might be thinking they’ve missed the boat on this particular oil company, we urge them to think again. Just to underline our confidence in the company, we think the best days for this company could still be ahead of it.
In fact, so confident were we in their future prospects, just last week we reiterated our BUY recommendation for the stock. The good news for new investors is that the shares still trade around the same level as last week…but given the surging oil price and that news of their latest drilling programmes is soon due, the shares may not last long at this price.
There Is Still Great Hope For These Two Oil Party Poopers
By contrast, you could say the share price performance of the other two oil companies highlighted above has been disappointing. Certainly, Members who bought at the price we initially recommended the shares will likely be disappointed to date as they are currently sitting on losses.
On the positive side…
· If we considered those two particular underperforming oil companies a BUY when their share prices were above today’s prices, AND…
· in the meantime the oil price has soared to over US$125 a barrel, AND…
· the companies have largely been progressing as we expected…
you would have to assume investors who bought the shares at today’s prices would still have excellent upside potential.
Now we’re not saying these two companies are going to make the almost 1300% gains of our Thai oil recommendation, but they certainly have the potential for significant appreciation from here, especially with the oil price high and possibly headed even higher.
The Oil Price Hits Yet Another Record High
On that note, the oil price continues to almost defy gravity, trading steadfastly above US$120 a barrel, and closing Monday this week at yet another record high above US$127 a barrel.
At the start of 2007, we re-iterated the view that we have held since 2001; that is, that the price of crude oil would reach US$100 a barrel. At that time oil was around US$60 and mainstream opinion was for a return to prices below US$50.
These views were scoffed at by other 'market experts' on numerous occasions. Investment banks for instance were still using US$30 oil prices in their valuation models a year or so ago.
And it seems they have still not caught up with the game completely. We noted a month ago that many energy companies continue to trade at compelling multiples. We said in our view, the share prices of quality energy stocks will undergo a re-rating over the next 12 months, and play catch up once it becomes completely apparent that oil's Membership of the US$100 club is for keeps.
Well, as we’ve seen from the share prices of the companies highlighted above, it seems like that re-rating has already begun. Yet since then, not only has the oil price jumped another 14%, but we’ve had…
· Goldman Sachs Group raising its oil price forecast for the second half of 2008 to US$141 a barrel. (as an aside, we wonder why they predict US$141 rather than US$140? If anyone from Goldman can enlighten us, that would be appreciated.)
· Goldman Sachs analyst Arjun Murti recently warned people to expect US$150 to US$200 a barrel oil prices over the next 10 years. And that’s all despite oil having already increased twelvefold in price over the past decade.
·
Call us simple folks, but adding it all up, we can’t help but think oil stocks and energy stocks in general have still got much further to run.
Gold Jumps Above US$900 An Ounce Again
But what about gold? It was all the rage back in March when it burst through the US$1000 an ounce mark, peaking at US$1032.70.
Since then, the price of gold has been at the whim of profit-takers, US dollar true-believers and sceptics, who believe that the precious metal’s dream-run is coming to an end, because of the metal’s recent correction from the US$1,000 per ounce level.
We have been at pains to point out to our Members that no strongly performing commodity, even gold, will continue to go up in a straight line. We view the current pull-back in the gold price as nothing more than a correction that is part-and-parcel of a strong underlying uptrend.
From a charting perspective, while several months of consolidation and base building are now likely, we believe that longer-term upward momentum will resume in due course, with new highs beyond US$1032.70 achievable in time.
Gold Is
Bear in mind that gold’s previous high of US$850 per ounce in 1980 represents at least US$2,200 per ounce in today’s inflation-adjusted terms, so whilst gold’s rise from US$250 lows just a few years ago may seem significant (and it is), we believe there is a lot more upside to come.
As we have discussed in the past, a key element of gold’s value is the metal’s function as a hedge against inflation. Increasing the supply of paper money is a simple matter for those central bankers who control the printing presses – crank ‘em up baby, just as Messrs Bernanke and Bush have been doing in the
Sourcing additional supplies of gold on the other hand is a challenging and expensive process.
To emphasise the point, total world gold production dropped by 1% last year. Between 1999 and 2006, there have been a grand total of only 24 one-million plus ounce gold discoveries. This compares with 23 in 1996 to 1998, and a further 128 from 1985 to 1995. No wonder the price of gold is near record highs, and we think is headed significantly higher.
In summary, we believe that the recent sell-off experienced by gold stocks across the sector presents a real buying opportunity.
One Gold Stock To Buy Today
Just last week we told our Members that the current weakness in the gold price, presented another exceptional buying opportunity for this large gold stock.
As an unhedged producer with a growing production profile and formidable resource base, we think this gold company offers excellent exposure to our view of continued gold price strength. Accordingly, last week we recommended the stock as a BUY to our Members at around $2.96.
Another Gold Stock To Buy Today
The share price performance of this small gold stock has been disappointing this year. However, the stock’s weak performance in our view doesn’t reconcile with the company’s development and future prospects.
Their key gold project is on schedule with its first gold poured just last week, instantly turning them into a gold producer with a highly prospective asset base.
Despite this, we did not consider it prudent to act on our favourable view while downward momentum remained firmly entrenched in the stock price. As such, we have been monitoring the company’s price action with a view to increasing our exposure once a suitable opportunity arises.
Just last week we upgraded the company as a BUY at around $1.10. This is a speculative and high risk stock, suitable for investors comfortable with a large degree of volatility. Nevertheless, in return for this high risk and volatility, we think the stock just might also offer exceptional returns.
We wish you happy and profitable long-term investing.
P.S. Gold bullion site Kitco said on Friday when talking about the gold price versus the oil price…"I don't see oil coming down, at least not sharply…So this suggests to me gold is undervalued relative to oil and that the adjustment is more likely to come through a rise in gold prices and not a decline in the oil price." These comments support our view of a rising gold price and a consistently high oil price.
P.P.P.S. As reported in the AFR last week, a paper by research group Bank Credit Analyst said that using the past 200 years as a guide, price rises for growth-sensitive industrial commodities could still have a long way to go. The paper effectively says the commodity price strength over the past 5 years has merely returned them to their long-term trend. It sounds to us like they agree with us – the resources boom is set to run for years and even decades ahead.
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