Two Big Flashing Buy Signals

As the price of oil surges through US$117 a barrel, we make one of our biggest calls yet – triple digit oil prices are here to stay.

Whilst that may be bad news for motorists and frequent flyers, it means some of our favourite smaller oil stocks offer even more compelling value, including two we highlight below.

But you might have to be quick…one of our favourite coal stocks has already surged 67% higher in just 2 weeks.

Dear Contrarian Stock Market Investor,

This week’s surprising fact is that the Dow Jones Industrial Average is down only 3.4% in 2008. And here was everyone thinking the US recession was taking a heavy toll on US share prices.

Back here in Australia…

· Monday saw the S&P ASX 200 Index jump 171 points or 3.1%, its 6^th largest one-day percentage gain in 2008.

· The S&P ASX 200 Index is still down 11.7% in 2008.

So much for the saying “when Wall Street sneezes, Australia catches a cold.” Wall Street has a little sniffle, but Australia has caught pneumonia.

You could be forgiven for thinking it’s just not fair.

The words of George Bernard Shaw spring to mind…

“Life is not meant to be easy my child; but take courage: it can be delightful.”

Stock market investing can be both an uplifting and demoralising experience. One day, when share prices rise, particularly when one of your smaller companies jumps 10% or 20% in one session, you are in heaven, feeling like an investing genius.

The next day, stock prices fall across the board, dragging down the good with the bad, and dragging you into a state of despair.

But, as the great Warren Buffett once said…

"The most important quality for an investor is temperament, not intellect.”

Remember…

· All stock market investing should be over the long-term.

· In the short-term, as we have seen from the divergence in the US versus Australian stock market performance to date in 2008, share prices can be irrational.

· The best investors take advantage of short-term irrationality in share prices to buy high quality companies at cheap prices.

Put another way, and continuing Buffett’s quote above...

“You need a temperament that neither derives great pleasure from being with the crowd or against the crowd."

As you’ll see a little further down, we remain firmly of the opinion that the continuing disconnect between commodity prices and resource stocks offers some very compelling investment opportunities.

However, you may have to be quick.

The Coal Stock Whose Shares Jumped 67% in Just Over 2 Weeks

For example, remember the small Queensland coal explorer we first told you about 2 weeks ago?

At the time, we said…

“We also think we’ve found another key winner, one that happily flies under the radar of most of the resource investment community. At a market value of around $260 million, compared to BHP’s $225 billion, we think it’s just a matter of time before this small Queensland explorer with the large and growing coal base will see its share price reflect the inherent value in the company.

…we currently rate this company as a BUY, having done so since mid December, in which time the share price has hardly moved. But that may be about to change, given the threefold increase in the price of coking coal.”

On April 4^th 2008, the shares traded at 57 cents. Fast forward to Monday this week and the shares closed at 95 cents, meaning they’ve soared a staggering 67% in just over 2 weeks!

This share price performance succinctly highlights 3 attributes that are key to long-term investing success…

1. In the short-term, even if you think you’ve found a compelling investment opportunity, it may take some time for it to be recognised by a rising share price. As ever, patience is required.

2. Share prices can rise very quickly and somewhat unexpectedly. Trying to time your buys and sells is a futile exercise – you’ll have a good chance of missing out on the best days and weeks.

3. There is no guarantee the share price of a cheap company cannot fall even further. But only in the short-term. In the long-term, value is always rewarded.

A little further down we highlight two smaller oil companies that are trading at significant discounts to their implied valuations. One jumped 12% just last week, but still remains 45% below its October 2007 peak. The other is already up over 900% since we first recommended it as a buy, yet we think its best days may still be ahead.

But first, a word on oil.

US$100 Oil Prices Are Here To Stay

The real excitement in recent weeks has surrounded the oil price.

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 in fact broken to fresh all-time highs, with prices reaching a record US$117 a barrel early this week. In our view, triple-digit oil prices are here to stay.

As regular readers will know, we’ve long been bulls on the oil price. But don’t just take our word for it….

As recently reported in the Australian Financial Review…

“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.”

Demand for oil is soaring worldwide. And the fast-growing economies of China and India, in particular, are putting a huge strain on supply. Meanwhile oil supply is shrinking.

In a recent CNBC interview, legendary Texas oil and gas executive T. Boone Pickens said he expects oil prices will hold near or above US$100 a barrel for the rest of this year. He also said he doesn’t believe he will ever again see oil below US$50 a barrel.

Then there’s the legendary investor Warren Buffett who in a recent interview also 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.”

Many Oil Companies Trade At Compelling Valuations

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.

As we noted previously these views were scoffed at by other 'market experts' on numerous occasions (whether all these can still be called experts following the sub-prime debacle is debatable). 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 note that many energy companies continue to trade at compelling multiples.

In our view the share prices of quality energy stocks will undergo a re-rating over the net 12 months, and play catch up once it becomes completely apparent that oil's membership of the US$100 club is for keeps.

All of which is good news for the two small oil companies we highlight below. But first, we attempt to answer the $64,000 dollar question on everyone’s lips…

Is It Safe To Buy Stocks Now?

One of the most popular questions we are asked here is whether it is safe to get back into the stock market.

Our stock answer is yes, but as long as you…

· Have a long-term investing perspective.

· Are buying the right stocks at the right price.

· Are avoiding the wrong stocks in the wrong sectors.

· Are avoiding excessive use of margin lending.

· Have a clear, understandable stock market investment strategy, one that you will continue to follow regardless of the day-to-day movements in the stock market.

· Can stomach 20% falls in the value of your portfolio whilst still sleeping well at night and not being spooked into panic selling at precisely the wrong time.

Then there’s our contrarianism, our ability to go against the crowd. When the stock market is all the talk at dinner parties, we become naturally cautious. On the other hand, when people are dumping the stock market in favour of cash or property, we become naturally bullish.

Which conveniently brings us onto…

The Two Big Flashing Buy Signals

Buy Signal #1

Last weekend, The Australian Financial Review’s Smart Money section lead with an article titled “Preserve Your Wealth”. The article featured five ways to preserve your wealth, including a cash fund, a cash-enhanced fund and bonds.

We make no criticism of the AFR, because as usual it is a very good article, but when we see the mainstream press featuring cash and bonds as investment options, we instantly see it as a sign that it is a good time to be buying shares.

Individual investors have an uncanny knack of buying shares at the top of the market and selling them at the bottom. When they sell, often booking a hefty loss, they usually sit on the sidelines during the market’s inevitable recovery, only buying again after the market has jumped significantly higher.

Don’t do it.

Don’t follow the crowd.

Having seen the stock market dive 18% from its November 2007 peak, the battered and bruised investing crowd is now considering investments in cash and bonds.

If you think about it rationally, it doesn’t make sense.

If people thought BHP Billiton was a buy back in November last year when the shares peaked at close to $48, AND since them commodity prices in general have risen, why wouldn’t they have been buying more BHP shares at the cheaper prices on offer?

We don’t follow the crowd. For example, in the midst of the January 2008 stock market mayhem, we rushed a special BUY alert email to our Members, recommending they buy BHP Billiton. At the time, the shares were just $31. This week, they traded at $44, up over 40% in just 2 months.

Enough said.

Buy Signal #2

As we said above, commodity prices in general have risen, yet the share prices of many resources stocks have fallen along with the rest of the market.

We believe some of the ‘disconnect’ has occurred because people have been selling resource stocks because they had done well in the past. Investors love booking a profit and hate booking a loss.

Anyone who has held resource stocks for the last couple of years has likely done well. They would likely be sitting on some nice profits. But because of the market turmoil, some forced selling due to margin calls and Opes Prime/Lift Capital related selling, people have dumped perfectly good companies, booking profits.

When having to make a forced sale, it is psychologically easier to sell stocks that have done well rather than sell stocks that are in the red. This has inevitably driven down resource company share prices.

Oil price – up over 45% since October last year.

Gold price – up almost 23% in the same period.

S&P ASX 300 Resources Index – virtually unchanged.

Now obviously the S&P ASX 300 Resources Index is made up of stocks other than oil and gold, and for sure, the share prices of some oil and gold stocks have fallen for perfectly valid reasons.

But as a general indication of the ‘disconnect’ between commodity prices and resource stock prices, we think the numbers above paint a pretty indicative picture.

In a perfect world and an efficient stock market, the share prices of resources companies would largely follow the underlying prices of their respective commodities.

But we don’t live in a perfect world, and at times (like now) the stock market can be inefficient.

To us, it all adds up to a buying signal for specially selected resource stocks.

Good Things Come To Those Who Wait

Take the small oil company we told you about last week.

As a reminder…

· The company is budgeted to produce around 300,000 barrels of oil in 2008, with profit margins after all expenses over US$50 a barrel. That translates into budgeted profits of around $16.5 million.

· As well as the potential to further develop its existing oilfields, the company has further growth potential from two identified opportunities. One has the potential for one million recoverable barrels of oil, the other a massive 25 million recoverable barrels. There are significant other growth opportunities too.

· The company is profitable, has no debt, has $11 million in cash, and is planning on drilling 15 more wells in 2008. It has a respected management team with hundreds of years of collective oil industry experience.

· Today the company is trading on a price to earnings ratio of just 4 times, making it one of the very cheapest oil stocks on the market. If that’s not enough, the company themselves think their own shares might be worth around $1.55, more than 300% above their current share price.

In our most recent update to Members, we said…

“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?”

Well, perhaps the market is finally waking up to this bargain priced oil producer. Last week its shares jumped over 12%. But that still leaves them 45% down on their October 2007 share price…

Oil price – up over 45% since October last year.

Share price of small oil producer/explorer – down 45% since October last year.

In anyone’s language, that is a disconnect.

In our language, this small oil company offers extraordinary value.

Remember, as we said above, value is always rewarded. You just don’t know when. But if you are not in it, you can’t win it.

Our Best Ever Recommendation To Date

Picking the right shares is obviously the key to making your stockmarket riches, and that’s where we think we can help you.

We generally focus on smaller companies – they are often 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 past recommendations have been smaller companies.

Take the small oil company that is already our best ever recommendation. The company typifies exactly what we are looking for when we search for stockmarket hidden gems.

We first recommended the stock as a BUY to our Members 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.

This was your typical under-researched small company. The share price had gone nowhere for the previous two years. As far as the market was concerned, it was a corporate basket case, a perennial under-performer, destined to spend the rest of its days stuck in penny share land, going nowhere fast.

But we noticed things were changing for the better. In our initial report in February 2006, our special buy email alert to Members said…

“Over the past 12 months, key board and management changes have occurred that indicate exciting times ahead for investors. The company now has all of the key foundations in place for success – a dynamic board and management team, a solid producing oilfield in Thailand, and the ability to evaluate and pursue projects on the international stage.”

The Cheap Tiny Company That Struck Oil

We also had the opportunity to meet with the company’s new Chairman and Chief Executive Officer to hear first hand about their plans to reinvigorate the company. Crucially, these two men had extensive mining sector experience, something we always look for with junior mining and resources companies.

Finally, the company was cheap, based both on its underlying oil assets and our positive view of the oil price. We concluded our BUY report by saying…

“The company’s market capitalisation is modest by industry standards, particularly given the quality of its board and management team, and its level of drilling activity. We believe the share price downside is limited and we recommend the company as a Buy to all Members around 5.4 cents.”

How You Could Have Turned $20,000 into over $200,000

Fast forward to now, and the share price of this oil company is around 55 cents.

For Members who bought at 5.4 cents, at 55 cents they’d be sitting on a profit of over 900%.

To put that into perspective, an investment of $20,000 would now be worth a quite unbelievable $203,703.70.

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 trade at today, you might be thinking you’ve missed the boat.

We beg to differ. There’s a stock market saying that you should cut your losers and let your winners run.

In the case of this small oil company, that strategy has been hugely successful to date. But rather than thinking investors have missed the boat, we think the best days for this company could still be ahead of it.

Even after the huge run up in its share price, the company is still only worth around $366 million, giving it the potential to grow into something much bigger.

We Upgraded This Oil Company To A BUY Just Last Week

In fact, so confident are we in the company’s future prospects, just last week we upgraded it to a BUY, our only new buy recommendation of the week.

Why?

· Last week they released a report by oil industry experts showing an upward revision of more than 300% in the company’s Thai oil reserves.

· Their attributable total 2P oil reserves (Proved & Probable) now stand at almost 11.4 million barrels. Total 3P reserves (Proved, Probable & Possible) are in advance of a staggering 45 million barrels of oil.

· We conservatively calculate the in-ground value of the company’s Thai oil reserves at 80 cents a share, some 45% above the current share price.

· There is more good news too in that the company is looking to accelerate its drilling programme for 2008 – we anticipate further details in the coming week.

· We concluded our Report by saying “…for Members with no current exposure we believe now is the right time to buy, and we recommend the stock as a Buy around 55 cents.

Searching For More Great Small Resource Companies

As we said above, some of our very best recommendations have been smaller companies.

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

The Small Oil Company Mentioned Above – Up an amazing 919% in a little over 2 years!

Terramin Australia – Up a breathtaking 674% since December 2005!

Platinum Australia – Up an astonishing 549% since November 2005!

(Share prices taken on Monday 21^st April 2008. Gains don’t include dividends.)

Don’t just take our word for it. Wilson Asset Management principal Geoff Wilson was recently quoted in the AFR 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.”

With the share prices of some of our specially selected small resource companies shooting higher in a matter of days, 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. As we’ve said previously, we think the world is experiencing a once-in-a-century boom via China. The country is undergoing unparalleled industrialisation, with an enormous rural migration to cities. The Chinese economy is growing at an annualised rate of 12%. For a country with over 1.3 billion people, giving it more than 20% of the world’s population, that sort of growth is simply stunning. We think resource-rich Australia is uniquely placed to benefit from the Chinese boom.

P.P.S. Bank of New York Mellon Corporation chief economist Richard Hoey was quoted in the Weekend AFR as saying “No one has a shorter-term time perspective than a hyper-leveraged investor with one hour to meet a margin call, which has created opportunities for those with a longer-term perspective.” We couldn’t agree more.

Three More Tremendous Buying Opportunities

Whilst the US economy and banking shares burn, China continues to boom, with resources stocks set to be the main beneficiaries.

Not surprisingly, BHP shares rose 9% last week. But some smaller resource companies did even better than that, with one of our favourites soaring 40% in the week.

We firmly believe there are some compelling buying opportunities in small resource stocks…but you may have to be quick.

Dear Long-Term Stock Market Investor,

A week can feel like a long time in the stock market. Where 2 weeks ago many stock market glasses were half full, now they are half empty again.

Last week we had another margin-lending broker calling in the administrators, this time Lift Capital. The effects of the Opes Prime collapse continued to reverberate around the stock market, especially hitting the share prices of some smaller resource companies.

The share prices of Tabcorp and Tatts Group were massacred by over 20% each after the Victorian government ended the companies’ gaming licensing duopoly.

All in all, it added up to the benchmark S&P/ASX 200 Index falling 3.2% on the week, its fourth largest weekly loss so far this year. For the 2008 year to date, up till the end of last week it was down a portfolio-damaging 14%.

Then late on Friday our time, US conglomerate and market bellwether GE reported disappointing first quarter results and cut its earnings outlook for 2008. Its shares slumped a whopping 13% on the day, its worst daily fall since the stock market crash of 1987.

The GE result once again confirmed the US economy continued to teeter on the edge of recession, that’s if it is not already in recession.

The headlines in Monday’s Australian Financial Review were not promising…

“Shares set for a shellacking”

“Gloom gathering as big names report”

“Lift sends that sinking feeling through the market”

“Corporate debt is the next time bomb”

Not surprisingly, Monday saw another 1.8% shaved off share prices, including Virgin Blue plummeting over 20% after warning of lower profits.

But as you’ll see below, we firmly believe there are some compelling buying opportunities, especially amongst smaller resource companies. But more on that a little further down…

Steer Well Clear Of Banks

We’ve been advising our Members avoid the financial services sector for quite some time now. We hate to say “we told you so”, but just take a look at last week’s share price action of the Big 4…

ANZ Banking Group – DOWN 12%

Westpac – DOWN 11%

Commonwealth Bank – DOWN 9%

NAB – DOWN 7%

We continue to advise our Members to avoid the banking sector.

The Resources Boom That Shows No Signs Of Stopping

Yet amidst all the negative headlines, the US economy, and the general doom and gloom surrounding the share market, there are plenty of positives…

· Last week, copper, crude oil, iron ore, coking coal and thermal coal all hit record highs, with oil trading above US$112 a barrel before falling back slightly.

· Although gold has come back from its recent peak of over US$1020 an ounce, it is still up over 20% in just the last 6 months.

· Last week, despite the falling stock market, BHP Billiton shares rose a very impressive 9%.

· In his AFR Weekend Market Monitor column, Glen Mumford said “I hold a view on equities at present…that the market might have already seen its lows.”

· In its April 2008 World Economic Outlook report, the International Monetary Fund (IMF) said that growth in China is expected to be 9.3% in 2008 and 9.5% in 2009, an excellent sign that the commodities boom is set to continue.

· Reserve Bank of Australia (RBA) thinks “that demand growth in Australia is now in the process of moderating.” We think such a statement suggests that interest rates are now firmly on hold.

Whilst The US Burns, China Booms

Whilst the US is burning, China and its fellow emerging economies like India are booming.

It seems obvious to us here that this all adds up to a resources boom that is set to continue for years, if not decades ahead.

Yet, judging by the share prices of some resources stocks, especially at the smaller end of the market, many investors refuse to believe it.

Change can be wonderfully enlightening and motivating. Whilst many people will happily admit to liking change, they continually fail to embrace it, falling back on their old habits or simply doing nothing different.

How else can we explain why we eat the same breakfast most days of the year, or how we are still banking with the same institution we first banked with when we were in primary school?

Change is here. In the years ahead, China will be the world super-power. Here in Australia, we can see the change happening now, but mentally we can’t quite accept it.

We can see the oil price above US$110 a barrel. We can see current oil consumption is virtually equal to current oil supply. We know the world population is growing, and will continue to grow. We can see it is getting more and more expensive to find new oil supplies. But mentally we can’t accept the long-term oil price is likely to stay above US$100 a barrel.

The Inevitable Turnaround In Resource Share Prices

We can see the changing of the guard. Like others, we can see the change. Unlike others, we embrace the change.

We are not stuck in the past, thinking the oil price will one day return to US$50 a barrel.

Despite its pull-back from US$1000 an ounce, we remain extremely confident in the long-term appreciation of gold in the face of a falling US dollar.

But there’s one thing we are not changing…that we continue to recommend our Members stick with the strength of this market, which is the resource sector.

In fact, in our most recent report to Members, we said “…the resource sector continues to present a tremendous buying opportunity. We encourage Members to remain patient and to wait for the inevitable turnaround in resource equities that we believe is not far off.”

In fact, the turnaround may have already started – a little further on we highlight a Queensland coal explorer who jumped almost 40% last week and a tiny South Australian explorer whose share price rocketed 25% on Monday this week.

Market Up, Market Down, Shake It All Around

At this stage, it’s worth reminding everyone that stock market investing should be long-term in nature – we’re talking 3, 5 and 10 years or more.

Share prices go up and down every single trading day. Some are “good hair days”, others are “bad hair days”.

One day everyone is worried that the US recession will be deeper and longer than expected. The next day everyone is worried that China’s growth is unsustainable. In both cases, the market will fall, dragging the good down with the bad.

The day after everyone is euphoric because the US recession might be relatively mild, Chinese inflation is easing and Carlton have finally won a game of footy. The market soars in delight.

It’s impossible to predict what the share prices of companies will do on a day-to-day, week-to-week or even month-to-month basis. Much easier to predict is what they will do on a year-to-year basis.

If you believe, as we firmly do, that…

· The Chinese growth story is here to stay for years and decades ahead;

· The oil price and the price of commodities in general are going to rise in the years and decades ahead;

it follows that you should invest in companies set to benefit from those mega-trends, and that you should do so with a long-term perspective.

As if to emphasise the point, 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%.”

Also remember history has shown that time in the market is more important to your returns than timing the market.

This Market Offer Tremendous Buying Opportunities

We believe there is a fundamental disconnect between the performance of resources share prices compared to the record commodity prices.

Whilst that might be frustrating for people who already own resources stocks, as we said earlier, we believe the disconnect offers patient, rational, long-term investors with tremendous buying opportunities.

This is especially so at the smaller end of the market. Many smaller resource stocks have seen their share prices hammered because of …

· Forced selling to meet margin calls.

· Opes Prime/Lift Capital related selling.

· Panic selling by people getting out the market at whatever cost, just to end the pain.

· A general lack of appetite to invest in smaller resource stocks, otherwise known as a flight to quality.

Of course, not all small resource stocks are made equal. For every quality resource stock, there are 20 or so very poor stocks, complete will little cash, highly speculative exploration tenements and with management whose number one priority is to try and cash in on the great mining boom of 2007.

The Perfect Time To Buy

What have margin calls, forced selling, panic selling and a flight to quality got to do with the value of a decent small resources company?

Not much.

What have margin calls, forced selling, panic selling and a flight to quality got to do with the price of a decent small resources company?

Quite a lot.

One of our favourite quotes of stock market investing legend Warren Buffett is…

“Price is what you pay. Value is what you get.”

The price of a company changes much more quickly than the value of a company. At any given moment, there can be a disconnect between the price of a company and its underlying value.

Because of a soaring share price, driven higher by greed and speculation, a company can be significantly over-valued.

Because of a sharply falling share price, driven lower by fear and forced selling, a company can be significantly under-valued.

One of the keys to successful stock market investing is to do so with a margin of safety. If, in your opinion, a company is significantly under-valued compared to its future profitability, that is the perfect time to buy.

Of course, there is no guarantee the share price of a cheap company cannot fall even further. But only in the short-term.

In the long-term, value is always rewarded.

There’s $380 Million Worth Of Value In This Oil Company

Let’s use a simple example to illustrate the point.

· You assume the long-term oil price averages between say US$80 and US$140 a barrel.

· You discover a company which is budgeted to produce around 300,000 barrels of oil in 2008, with profit margins after all expenses over US$50 a barrel. That translates into budgeted profits of around $16.5 million. You estimate the value of this existing field at around $120 million.

· As well as the potential to further develop its existing oilfields, the company has further growth potential from two identified opportunities. One has the potential for one million recoverable barrels of oil, the other is estimated by the company to be worth between $135 million and $200 million. There are significant other growth opportunities too.

· The company is profitable, has no debt, has $11 million in cash, and is planning on drilling 15 more wells in 2008. It has a respected management team with hundreds of years of collective oil industry experience.

· In a recent broker presentation, the company itself estimated its total risked potential value to be around $380 million.

What price might you expect to pay for this company with an estimated value of $380 million?

Remember, price is what you pay, value is what you get.

In a “greedy” market, you might expect to pay around $340 million, a modest 10% discount to its estimated value.

In a “normal” market, you might expect to pay around $265 million, a 30% discount to its estimated value.

In a “fearful” market, you might expect to pay around $115 million, a 75% discount to its estimated value.

Would you be prepared to pay $115 million for this company? We’d suggest you’d seriously consider it.

Wake Up Market And Smell The Coffee

By this stage, you’ve probably twigged that this is a real company, a company we recommended our Members BUY back in July last year.

In our most recent update to Members, we said…

“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?”

How much would you pay for this company?

We suggested above you’d seriously consider paying $115 million.

How about if we told you today, you can pay around $80 million for this company?

The price is $80 million. The value is $380 million. To us, that is investing with a large margin of safety.

Warren Buffett once explained how he looks at margin of safety…“You build a bridge that 30,000-pound trucks can go across and then you drive 10,000-pound trucks across it. That is the way I like to go across bridges."

The Coal Explorer Whose Share Price Soared 40% Last Week

Thankfully, not all smaller resource stocks have had their share prices in the doldrums.

As reported in the AFR last week, Korean and Japanese steel makers have confirmed the price of coking coal for 2009 contracts was settled at US$305 a tonne, more than trebling the current price of US$98 a tonne.

Last week we told you about the key winner we thought we’d found from the trebling in the coal price. We said it was a company that happily flies under the radar of most of the resource investment community.

We said…“At a market value of around $260 million…we think it’s just a matter of time before this small Queensland explorer with the large and growing coal base will see its share price reflect the inherent value in the company.”

It seems like it hasn’t taken too long for the market to recognise the company’s value – last week alone, the share price jumped almost 40%.

As a reminder, there are plenty of other things to like about this company too…

· It has no debt and $55 million cash in the bank.

· It is focused on coal exploration and development in Queensland, having accumulated attractive acreage positions comprising four projects that are at various stages of maturity.

· Its aim is to progress its current identified coal resources towards production within the next few years whilst at the same time, further exploration will hopefully yield new coal deposits – it has an aggressive exploration programme during 2008 worth $15 million, almost double last year's budget.

· In terms of resources, it aims to boost its coal resources from over 100 million tonnes to somewhere between 280 - 480 million tonnes.

· In terms of production, it is targeting first coal production during 2011 and has a target of 12.5 million tonnes of coal production by 2014/15.

· Longer-term coal demand is anticipated to rise by around 60% between now and 2030, according to the World Energy Council. Of this demand, Asia is expected to account for around 86% of the increase.

We think the firm share price gains last week signal a clear revival of longer-term upward momentum. Given the strength of global coal prices, we believe the outlook for this Queensland coal explorer remains excellent.

The charts also remain promising. Just last week we said…

“Notwithstanding the potential for a brief period of consolidation in the near-term, we believe that prices will soon break above resistance at 80 cents. In our opinion, such a move will add further buoyancy to positive investor sentiment, opening the door to an eventual retest of the all-time high of January at $1.135.”

This week, the share price has indeed broken above the 80 cents resistance level, meaning that from both a charting and a value perspective, the future looks very promising for this Queensland coal explorer.

Beware: Share Prices Can Rise VERY Quickly

In a tough market such as this, it’s virtually impossible to predict when a company’s share price will reflect its value.

The oil explorer/producer above is still waiting for its price to catch up to its value. But if you are approximately right in your valuation of a company, the share price will eventually reflect that value. You just don’t know when.

But, when it happens, it can happen very quickly, as we have seen with the Queensland coal explorer above, where its share price jumped almost 40% in just one week.

Another of our Report companies saw its share price jump a whopping 25% in just one day this week alone.

In our most recent Report to Members, we said…

“We continue to rate this company as one of the sector’s best pure exploration plays…they have one of the best acreage packages and technical teams in the business.”

Since that Report, just a few weeks ago, the share price has jumped OVER 50%.

Yet, even after that jump in the share price, the whole company is valued at around $13 million, of which around $7 million is cash.

The company is a focused explorer searching for world class ore deposits iron, oxide, copper, gold and uranium in South Australia. Its two project areas are close to BHP Billiton’s huge Olympic Dam mine. Last year, BHP upgraded its estimate of copper and gold in the deposit, with the present in-the-ground value of the uranium, copper and gold surging past $US1000 billion.

With the small explorer having recently recommenced drilling on one of their project areas, and more drilling slated for the second part of this year for their other project area, we look forward to more positive news – news that will hopefully soon see an increase in the company’s value and also its share price.

Searching For More Great Small Resource 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.

We generally focus on smaller companies because they 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 to Members when they were worth less than $30 million. Just look at the stunning gains they’ve racked up since…

Terramin Australia – Up a breathtaking 570%* since December 2005!

Andean Resources – Up an amazing 524%* since November 2005!

Platinum Australia – Up an astonishing 481%* also since November 2005!

(Share prices taken on Monday 14th April 2008. Gains don’t include dividends.)

Don’t just take our word for it. Wilson Asset Management principal Geoff Wilson was recently quoted in the AFR 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.”

Know Exactly Which Shares To Buy When The Market Rebounds

We pride ourselves on being prepared. Between our two flagship publications we currently have OVER 100 different companies in our hypothetical portfolios.

Our experienced analysts also have a solid working knowledge of hundreds of other companies too. Many of the companies we follow are smaller companies, some of which have been hammered during the recent market sell-offs.

But rather than panic, we see many of the share price falls in smaller resource stocks are great buying opportunities – witness the companies highlighted above.

With the share prices of some of our specially selected small resource companies shooting higher in a matter of days, 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. On Tuesday this week, QBE announced a takeover offer for fellow insurance group IAG, owner of the NRMA, SGIC, SGIO brands, amongst others. The offer was rejected by IAG, yet IAG’s share price still jumped 11%. Only last month, IAG’s shares languished around the $3.20 mark, some 38% less than the price now. It took the takeover offer to do it, but now the share price is a lot closer to the company’s value – as we said above, value is always rewarded, eventually, and sometimes faster and quicker than anyone expected!

P.P.S. The poor share price performance of the West Australian gold explorer we told you about a few weeks ago continues to stagger us. We have had numerous meetings with their Managing Director, and we must reiterate that in our view the company appears to be doing everything right. We think the current price weakness will soon present an outstanding buying opportunity for astute investors.