We Name Two More Small Resource Stocks Today

With the stock market jumping over 3% on Monday alone, suddenly a wave of investor optimism has returned.

Calling All Serious Stock Market Investors…

This is a time to be brave.

It is a time to be bold.

As we said last week, we firmly believe the worst is over, and the market is closer to the bottom than the top.

In fact, following Monday’s 160 point or 3.3% jump in the All Ordinaries Index, we may already have seen the bottom.

But even if we have passed the bottom, that is NOT a reason to sit on the sidelines. After the 3.3% jump on Monday, the All Ordinaries Index was still down a massive 26% from its peak of November last year.

Stocks Are Still Cheap Today

Most stocks that were cheap last Friday are still cheap today.

Take the one small oil stock we named last week, Salinas Energy.

In the week since we highlighted that stock to readers of this email, the share price has jumped from around 33 cents to around 36 cents, a rise of around 9%. In a tough market like this, with the oil price falling, we think you’ll agree that is an impressive move.

Right now, with Salinas shares around 9% higher in just the last week, you may be thinking you’ve missed the boat.

Well we’ve got news for you. If we thought the Salinas Energy share price was only going to rise 9% from the 33 cents it traded at last week, you’d be sadly mistaken.

Although the 9% price hike gives people who bought last week at 33 cents a nice “feel-good” factor, over time we think the one-week 9% rise will pale into insignificance.

What sets us apart from other services is our ability to focus on, amongst other things…

• Recommending companies in sectors and industries we think offer excellent long-term prospects.

• Recommending companies with outstanding management teams and proven track records. Wherever possible, we try to meet with management to get an even better idea of a company’s prospects. We find there’s nothing better than seeing the whites of management’s eyes when recommending a company to the thousands of our paying Members.

• The long-term attractiveness of the stock market and in particular, the stocks we recommend as a BUY to our paying Members.

The last point is an important distinction. We are not interested in timing the market and short-term pops in the share price, such as we’ve seen with Salinas Energy.

There Is A Lot Of Good Value In This Stock Market

We take a long-term perspective when recommending stocks for our Members to buy. In the short-term, share prices go up and down based on supply and demand. One day, when shares are in favour, the share price might rise. The next day, when shares are out of favour, the share price might fall.

Those sorts of movements are just noise. The very best investors are immune to stock market noise.

For example, John Murray of Perennial Value Management was quoted this week in the Australian Financial Review (AFR) as saying…

“One day the market is up and the other day it is down.”

“Our view is that there is a lot of good value in the market.”

“Investors have to try not to be caught up in the day-to-day machinations of the market.”

We couldn’t agree more.

In fact, we go two steps further, by actually naming two of our very favourite resources stocks, both of whom we think have been beaten down too far by this vicious bear market.

Read on for details of those two companies …

One Great Stock Market Day Can Make All the Difference

What a difference a day can make to the mindset of investors. Suddenly, after Monday’s 160 point or 3.3% jump in the All Ordinaries Index, the mood on the street is one of optimism.

We guess it’s not too surprising, given the rise was the 7th largest one-day gain in the S&P/ASX 200 Index since 1992.

Take some of these quotes in Tuesday’s AFR…

“There seems to be a bit more calm in the market.”

“I think you have the set-up for a more sustainable rebound…Previously, there was clear evidence that some people were just giving up.”

Then we had the eagerly awaited results from Bank Of America, which reported quarterly profit that fell less than expected on record revenue. Not surprisingly, the shares bounced in Monday trading in New York.

Credit Crisis Not As Bad As People Thought

Following the Bank Of America results, Reuters quoted Steve Roukis, managing director at Matrix Asset Advisors, as saying “It suggests the credit crisis isn't as bad as people thought. A week ago there was tremendous fear about systematic risk to the system. There's definitely a floor here.”

Again on Reuters, Bank of America Chief executive Kenneth Lewis was quoted as saying on a conference call: “We do not yet see the economy slipping into prolonged recession," but "sluggishness" will likely persist through year-end.

If Lewis is correct, and the US economy is not looking at a prolonged recession, the stock market could be set for a substantial rebound.

Many stocks are priced as if a recession is guaranteed. If we’re talking about a ‘sluggish’ economy in 2008, that in itself could be enough to light a flame under the share prices of some beaten down stocks.

As you’ll see below, we think there are some compelling stock market bargains, two of which we actually name today.

Small Resources Stocks Look Plain Cheap

As regular readers of this email will know, we have consistently been bullish about the resources sector.

In recent weeks, we have become even more bullish about smaller resources stocks. As a group, they have seen their share prices hammered as investors have indiscriminately sold them off.

Our overwhelming view is that, in the resource sector specifically, the small caps are being priced way too pessimistically. We're not sure when they'll begin to benefit from better market sentiment. But we do know that good companies, whether explorers, developers or producers, will eventually be rewarded.

So instead of selling or sitting there doing nothing, instead we think you should be taking the opportunity to add to positions over the next few months to gain even greater benefit from the eventual recovery.

The bottom line is that natural resources stocks have some of the best earnings potential and the lowest valuations in the entire share market.

Our portfolios are chock full of what we consider to be high quality, cheap resources stocks.

We Name Two Cheap Resource Stocks

We named one of our favourite cheap resource stocks above – small oil producer Salinas Energy.

Today we name two other small resource stocks we think are downright cheap. Not surprisingly, both are gold producers.

Why gold? We remain of the opinion that the gold price is headed back above US$1,000 an ounce in the not too distant future, and stand by our year-end prediction of US$1,100 an ounce.

If that prediction comes anywhere near being right, we think these two small gold producers, plus all the other gold stocks in our portfolios, could be set to soar higher.

Cheap Small Resource Stock #1

St Barbara is a West Australian based gold exploration and production company. St Barbara’s current production is coming entirely from their Southern Cross operations. Although they hit their production target for the previous 12 months, in tune with many other miners, higher costs have crimped their profits.

While that’s rightly the area of focus at the moment, there are some good things going on at St Barbara. We think they have huge exploration potential and we think their $35 million annual exploration budget is yielding results.

Having recently raised new money at a share price of 40 cents, St Barbara now has around $110 million in cash. With their recent share price around 27 cents, the company is worth in total around $360 million.

We remain confident on St Barbara’s prospects. A gold price well above US$1,000 will no doubt provide a boost to sentiment, and we anticipate new highs in the gold price later this year.

Cheap Small Resource Stock #2

We have long regarded Avoca Resources as a highly attractive, emerging gold play. In a sector dominated by projects with high-cost operations and flagging profitability, this company is set to be a fresh new face on the block, with strong operating margins.

Avoca has recently confirmed that its brand new $77 million underground gold mine has been commissioned. Amazingly, it is the first new gold operation in Western Australia since 2001.

Avoca’s Higginsville gold project boats a +1 million ounce gold resource base that is continuing to grow in size. Based on the most up-to-date resource estimate announced in late-2007, the Higginsville resource base comprises 1.35 million ounces of gold.

We feel the upside potential remains enormous. Avoca currently controls the gold belt between the 15 million ounce St Ives and six million ounce Norseman goldfields.

We remain overwhelmingly positive on this company’s story. There are very few emerging, high-quality gold producers in the Australian market. With the shares currently trading at around $1.85, Avoca company is currently trading on a price-earnings multiple of around 13 times forecast 2009 consensus earnings.

When Will This Bear Market End?

We think those two gold stocks will do well over the coming weeks, months and years.

In fact, we are very confident in the future prospects of ALL our portfolio stocks. As we’ve said in the past, we view market corrections as an opportunity.

Yet many people remain reluctant to invest in the stock market in the midst of this bear market.

If we knew when this bear market was going to end, we’d be millionaires.

We won’t pretend we are able to accurately predict the future. That said, we are in the business of making educated guesses about the future. So here goes…

By the time you read this, the bear market might already have ended.

If it hasn’t already ended, it might end tomorrow.

It might end this month.

It might end this year.

It might end next year.

It might end sometime after that.

You’re right – we’re sitting on the fence.

You see, bear markets are somewhat difficult to accurately define. We fully know their accepted definition is a fall of 20% or more from their peak.

The Australian stock market peaked in November last year and is now down around 25%, making it officially a bear market.

Here A Bear, There A Bear…

But it’s not a bear market for large resources stocks.

Yet it’s an even bigger bear market for most banks, retailers and smaller companies.

So although this is officially a bear market, it doesn’t mean all stocks are falling, and it doesn’t mean all stocks are falling by the same amount.

As usual with stock market investing, it’s a case of picking the winners and avoiding the losers. That’s exactly what we try to do.

What The Very Best Investors Do In Times Like These

What do you do during these times of periodic stock market wobbles?

We don’t blame you if you sit on the sidelines, waiting out the storm.

But what really sets the best investors apart from the average investors is their ability to calmly and rationally assess the situation, to concentrate on the underlying value of the company and not its falling share price, and to take advantage of the falling share market to buy some more of their favourite shares at even cheaper prices.

That’s exactly what we try to do. We concentrate on finding good quality, cheap companies to recommend to our Members as a BUY.

We wish you happy and profitable long-term investing.