In uncertain market conditions – and I don’t think there is any doubt that is where we are right now – investors start looking for places to stash their money. The fearful, reactionary approach, which is the reason you hear so much about things like “flight to quality,” is to take all of your capital out of the stock market and put it into cash or, at most, extremely conservative, low-yield instruments like Treasury bonds.
If you’re trying to keep your money working for you, even under uncertain economic conditions, though, the problem with that approach is that it really isn’t much different than just stuffing your cash under your mattress. As of this writing, the yield on a 10-year Treasury note is just 0.73%, while on a much longer-term, 30-year Treasury yield it’s just 1.34%. That doesn’t really give you any ability to generate income that is practical or useful in any kind of real sense. At the same time, it might sound better than taking a chance with the stock market, where prices on a lot of even the biggest and most established names are down -20%, -30% or in some cases even more right now from their peaks.
Is there a middle ground between the two extremes, where you can find an opportunity to keep your money working for you but not be exposed to extreme market risk, or even better, you might even be able to hedge against that extreme volatility risk? While I don’t think any sector or industry in the market is immune from broad market or economic risk, it is interesting to observe that under uncertain conditions, there are areas that tend to behave in a more defensive nature. If you’ve followed my posts in this space before, you know that I like to use Consumer Staples as a sector that can offer this kind of hedge, and Food Products stocks in particular. Another is the Metals & Mining industry in the Materials sector. One of the reasons it’s common to start seeing more commercial advertisements on television, radio, and even the Internet about buying precious metals like gold and sliver is because the prices of these commodities tends to increase when stock prices are dropping and economic conditions are turning negative.
While I’m not calling for an imminent recession, I do think that there is a risk that if the spread of COVID-19 is, as some predict, more serious than anticipated, it is possible that what many businesses and other organizations are hoping are temporary measures to limit exposure and ultimately get back to life, and business as usual could last much longer than hoped. If that is the case, there is a stronger to argument to make that the economic impact could be more serious than many seem to expect. If that is true, the companies that make up the Metals & Mining industry could be some of the smartest investments to consider. Agnico Eagle Mines Ltd is a name you might not think of immediately, but it is one of the largest North American-based, international gold producers. The stock has not been immune from market volatility; in the last month, the stock is down about -22.5%, with most of that drop coming in the last week. The interesting thing is that the stock’s drop may be setting up the right kind of opportunity to take advantage of a sector that could well outperform the market if conditions remain strongly bearish, in a stock that has an improving fundamental profile along with an interesting value proposition. Let’s dive in and take a look.
Fundamental and Value Profile
Agnico Eagle Mines Limited (Agnico Eagle) is an international gold producer with operating mines in Canada, Finland and Mexico and exploration and development activities in each of these countries as well as in the United States and Sweden. The Company operates through three business units: Northern Business, Southern Business and Exploration. Northern Business is comprised of the Company’s operations in Canada and Finland. The Company’s Canadian properties include the LaRonde Complex, the Goldex mine, the Meadowbank Complex and the Meliadine mine. The Company’s Southern Business is comprised of the Company’s operations in Mexico. The Company’s Exploration group focuses primarily on the identification and evaluation of new mineral reserves and mineral resources and new development opportunities in gold producing regions. Its exploration activities are concentrated in Canada, the United States, Mexico, Finland and Sweden. AEM has a current market cap of $9.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings rose 164%, while sales improved by 40%. in the last quarter, earnings were flat while sales increased by a little more than 10%. The company’s margin profile is healthy, and getting stronger; in the last twelve months, Net Income as a percentage of Revenues was 18.9%, and improved significantly to more than 44% in the last quarter. This is a big mark of fundamental strength.
Free Cash Flow: AEM has minimal free cash flow of just $2.72 million over the last twelve months; however it is noteworthy that number was -$496.75 million just about a year ago, so this marks a strong positive reversal, and is a good confirmation of the improving fundamentals shown by the Net Income pattern.
Debt to Equity: the company’s debt to equity ratio is .29, which is very low and is reflected in the company’s balance sheet. As of the last quarter, cash and liquid assets were $414.25 million versus about $1.36 billion in long-term debt. I think that right now, it’s smart to focus on stocks with strong balance sheets, which means healthy operating margins bolstered by good liquidity, and manageable debt. AEM fits that description.
Dividend: AEM pays an annual dividend of $.80 per share, which translates to an annual yield of 1.95% at the stock’s current price. That doesn’t sound impressive compared to the dividend yields other stocks are offering right now, but their dividend payout is also a sign of fundamental strength, since it is less than 50% of their annual earnings per share.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $63 per share. That means the stock is significantly undervalued, with 51% upside from the its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend from its highest price in August 2019. It also informs the Fibonacci retracement lines shown on the right hand side of the chart. The downward trend is easy to see, with the stock plunging this week to a low at around $32 before rallying back pretty strongly to its current price around $40. It is about $4 below current resistance, at the 38.2% Fibonacci retracement line, with practical support at $37, around Friday’s close and near to yesterday’s close. A drop below $37 could the stock test the $32 bottom, while a break above $44 could give the stock bullish momentum to about $51, where the 61.8% retracement line sits.
Near-term Keys: If you prefer to work with short-term trading strategies, and you don’t mind being aggressive, the stock’s bullish move over the last day and a half in the face of continuing bearish pressure could be a signal to buy the stock or even to work with call options, with an eye on taking profits at around $44 per share. If the stock drops back, and moves below $37, consider shorting the stock or working with put options, and be ready to take profits around $32 to $33 per share on a bearish trade. The stock’s fundamentals are strong, and the value proposition is compelling; if you aren’t afraid of dealing with some near-term volatility, this is a stock that could offer an excellent opportunity if broad conditions remain bearish, and the economic picture continues to get worse.