As all of us – investors or not, regular Joe, big businessman, policy-making politician, healthcare professional, whatever your position or status in the world may be – try to come to grips with current world conditions and what they mean in real terms, I think it’s pretty normal to get anxious. It’s human nature to fear the unknown, and right now it seems like there are more questions than answers when it comes to the actual spread and effect of COVID-19.
The fear of the unknown may be most easily seen in the way markets react to it. Forget about all of the supposition and speculation on any side of what is going on right now – the truth is that the U.S. stock market’s plunge from mid-February, all-time highs isn’t really about the fact that coronavirus is happening all over the world. It’s really about the fact that we don’t know how long it is going to last, or how far businesses and organizations throughout the working world are going to have to go. And that question isn’t just about limiting the spread of the virus – it’s about how dramatic the real impact is going to be on the ability of business, to stay in business and keep commerce flowing. On an individual level, that means that we don’t know if unemployment will spike, or remain manageable.
This morning, news media is buzzing about measures the U.S. government is working to put in place to aid small business, the average American worker, and potentially even to prop up some of the biggest and most important businesses in the North American economy – think Boeing (BA) – that employ tens, if not hundreds of thousands of workers. While the expectation is probably reasonable that such news should help to calm investor and economic fears, in the near-term it looks like the market’s reaction falls into the “sell the new” category, as the market continues to move lower so far this morning.
It’s been interesting to stay in touch with friends and associates in other areas of business during these times. A lot of them work in the tech sector, or in service industries, and so most of them are being sent to work from home right now. Most are pretty nervous and anxious about the near-term, but it’s also interesting to see many of them starting to talk about the fact that when things start to stabilize, there should be some really useful buying opportunities. They also tend to ask me about ways to stay in the market now, while limiting some of the near-term, broad market risk. Yesterday, I wrote about Agnico Eagle (AEM), a Canadian mining company that I think could offer an interesting blend of hedge against broad market volatility and very useful value. Another major name in the industry is Newmont Mining Corp (NEM), which is perhaps the largest U.S.-based mining company. When you hear analysts and experts start talking about the practicality of precious metals as a hedge against market risk, it’s a good bet NEM will be one of the first companies that gets mentioned. Does NEM have a similar, compelling balance between its usefulness as a hedge and its value proposition? Let’s find out.
Fundamental and Value Profile
Newmont Corporation, formerly Newmont Goldcorp Corp, is a mining company, which is focused on the production of and exploration for gold, copper, silver, zinc and lead. It is primarily a gold producer with operations and/or assets in the United States, Australia, Peru, Ghana and Suriname. The Company’s segments include North America, South America, Asia Pacific and Africa. Its North America segment consists primarily of Carlin, Phoenix, Twin Creeks and Long Canyon in the state of Nevada, and Cripple Creek &Victor (CC&V) in the state of Colorado, in the United States. Its South America segment consists primarily of Yanacocha in Peru and Merian in Suriname. Its Asia Pacific segment consists primarily of Boddington, Tanami and Kalgoorlie in Australia. The Company’s Africa segment consists primarily of Ahafo and Akyem in Ghana. As of December 31, 2016, it had gold reserves of 68.5 million ounces and an aggregate land position of approximately 23,000 square miles (59,000 square kilometers). NEM has a current market cap of $36.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings rose 25%, while sales improved by close to 45%. in the last quarter, earnings increased almost 35% while sales increased by a little more than 9%. The company’s margin profile is healthy; in the last twelve months, Net Income as a percentage of Revenues was 28.7%, narrowing somewhat to 19% in the last quarter. Even with the drop in the last quarter, this looks like a big mark of fundamental strength.
Free Cash Flow: NEM has modest free cash flow of $1.4 billion over the last twelve months. That translates to a Free Cash Flow yield of 3.79%.
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. NEM fits that description.
Dividend: NEM pays an annual dividend of $.56 per share, which translates to an annual yield of 1.22% at the stock’s current price. That doesn’t sound impressive compared to the dividend yields other stocks are offering right now, but the majority of stocks in the Materials sector pay no dividend. It is also noteworthy that their dividend payout is less than 30% of earnings, which is strong indication it should be safe.
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 $31 per share. That means the stock is actually pretty heavily overvalued, with -33% downside from 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 upward trend from May of last year to its peak earlier this month. It also informs the Fibonacci retracement lines shown on the right hand side of the chart. The decline from that peak can’t be missed, with the stock plunging to a low at around $34 last week before rallying back pretty strongly to its current price around $40. Immediate support is around $37, with closest resistance at around $46, then $52.50 at the February peak. If the stock drops below support at $37, it could drop to anywhere between $33 and $29 – the stock’s 52-week low – very quickly given the pace of volatility the stock has seen since its peak a couple of weeks ago.
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 $46 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 $29 to $32 per share on a bearish trade. The stock’s fundamentals are strong, but the stock doesn’t have a great value proposition; it would actually need to drop to around $25 before that becomes realistic. If you’re thinking about using NEM as a market hedge, keep in mind that any potential for growth would be based primarily on its strong fundamentals, and sentiment towards the industry.