Sprott Asset Management’s Top Five Stock Picks

Sprott Asset Management, managed by the infamous precious metals bull Eric Sprott, is an investment advisory firm with an estimated $9.7 billion in assets under management. Sprott’s fund has investments in a wide array of asset classes, and has about 8% of his capital invested in US equities, as noted by his $762 million 13F portfolio. Among Sprott’s portfolio is a wide array of stocks in the basic materials sector, which comprises close to three-fourths of his total holdings. Here’s a peek at the fund’s 13F portfolio, but we’re going to take an in-depth look at its top five stock holdings, due to the fact that his 13F returned over 36% last quarter.

First Majestic Silver Corp (NYSE:AG)

First up on our list is First Majestic Silver Corp (NYSE:AG), which has returned 28.4% in 2012 thus far. With its headquarters in Canada, First Majestic explores for and produces silver in Mexico, focusing predominantly on four different mining sites. The largest mine in the company’s possession is its La Encantada site, which accounts for over half of the company’s total production.

Sprott currently owns over $64 million worth of First Majestic, good for 8.4% of his total 13F portfolio. A chief driver of the stock’s growth this calendar year is a record level of production, in addition to a rare, community-first approach to silver mining. The company has gone beyond country-specific environmental regulations multiple times throughout its history, most recently at its La Parrilla mine to eliminate groundwater pollution.

First Majestic’s third quarter was especially impressive, as the company reported more than 2 million ounces of silver were produced for the first time in its history; full financials are released early next month. Now, the company has underwhelmed in two straight quarters, but analysts are expecting stagnant EPS growth in Q3, more or less, and shares of First Majestic currently trade at a modest P/E of 5.6X and a PEG ratio of 0.56.

Moving on to the rest of Sprott’s top five, the fund’s remaining picks are: Alexco Resource Corp. (NYSEAMEX:AXU), Fortuna Silver Mines Inc. (NYSE:FSM), Coeur d’Alene Mines Corporation (NYSE:CDE), and  Allied Nevada Gold Corp. (NYSEAMEX:ANV). Now, this group has been a rather middling investment since the start of the year, but each – excluding Alexco – has been up over 40% in the past three months.

Alexco and Coeur d’Alene mine an array of minerals, while Fortuna sticks to silver and Allied Nevada explores and produces gold only. As its name suggests, Allied Nevada’s operations are centered in Nevada, while Alexco has solid reach in the Yukon, Fortuna in Peru and Mexico, and Coeur d’Alene in the Americas and Australia. Out of this bunch, Coeur d’Alene (81.5%) has generated the most impressive annual revenue growth post-recession, and Fortuna (64.2%) isn’t far behind.

Interestingly, First Majestic (89.8%) has experienced an even hastier top line expansion, but still trades at a measly sales multiple of 0.24. This is below the likes of high-growth peers Coeur d’Alene (2.5X) and Fortuna (4.2X), in addition to Alexco (2.6X) and Allied Nevada (20.7X). In comparison to its own historical averages, First Majestic also trades at a discount.

We mention the stock’s sub-1.0 PEG a few paragraphs above, but to compare, only Coeur d’Alene is at a similar undervaluation, despite expecting EPS growth over the next five years nearly six times that of First Majestic. Early analyst estimates predict that First Majestic will experience solid earnings appreciation of 10% a year over the next half-decade on the back of its aforementioned production gains. Coeur d’Alene has a forecast that is significantly more bullish, as its breadth of operations allows it to have greater earnings potential, but slightly less efficient operations, as First Majestic trumps Coeur in terms of operating and net margins quite significantly.

Out of Sprott’s top five stocks listed here, we like Coeur d’Alene and First Majestic the most, due to their earnings undervaluations and superior growth post-recession. Other money managers invested in the stocks we’ve discussed include David Dreman, Cliff Asness, Jim Simons, and Chuck Royce. For a complete listing of the hedge fund industry’s sentiment toward these stocks, continue reading here.

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