Greenlight Capital, managed by billionaire David Einhorn and his team, reported to investors in its third quarter letter that it had gained 13% net of fees during the first three quarters of 2011- about even with the S&P 500 index, and keep in mind that Greenlight has significant short positions which likely held down the fund’s gains but are a good thing for investors because they reduce downside risk. In its investor letter (read billionaire David Einhorn’s letter to investors), Einhorn dedicated much of his time to following up on his picks from this month’s Value Investing Congress. Read our reaction to the presentation Einhorn gave about shorting Chipotle. However, he also bemoaned the worldwide frenzy of accomodative monetary policy, frustrated that central bankers are seemingly creating financial bubbles and ignoring the fact that the market will eventually set limits on their actions. Einhorn concluded that investing in gold was “a very good idea.” Billionaire John Paulson is another notable investor who has been long gold recently; the top two holdings in his fund’s 13F filing for the second quarter had exposure to gold. While many investors could buy ETFs or futures, here is our quick take on some gold mining stocks that could be alternatives.
Gold miners generally reported worse financial results in the second quarter of 2012 than in the same period in 2011. The biggest drop in earnings came at Yamana Gold Inc. (NYSE:AUY), where a 7% decline in revenue sent net income down 78%. Yamana- whose mines are located in Latin America- trades at 33 times trailing earnings. Another commonality among gold miners is that Wall Street analysts expect that their results will be considerably better in 2013, and that is the case at Yamana as well: its forward P/E is only 12.
Newmont Mining Corp (NYSE:NEM), due to its low earnings on a trailing basis, sees an even greater improvement in its earnings multiple when looking ahead to next year. Its forward P/E is only 10, meaning that it trades at a discount to most of the gold miners we discuss here on that basis. Newmont’s gold properties are located globally and its 2.5% dividend yield is the largest of the five gold miners we consider in this article. Its earnings were 28% lower in its most recent quarter than a year earlier.
The cheapest stock, in terms of forward earnings multiples, is the largest of the five gold miners we cover here: Barrick Gold Corporation (NYSE:ABX). Barrick, at a market cap of about $39 billion, trades at 8 times forward earnings estimates and only 9 times trailing earnings, giving it a good case to be considered as a value stock even if an investor is not particularly interested in gold. Net income at the company dropped 35% in the second quarter versus a year ago, but would need to fall further to make it overpriced- a phenomenon which would likely be shared with these peers.
Goldcorp Inc. (NYSE:GG) is also on the larger end of these companies, at a market cap of $33 billion. Its revenues fell 16% in the second quarter compared to Q2 2011, bringing earnings down by 45%. It trades at 14 times forward earnings estimates, and this figure reflects consensus that the company will improve strongly over its trailing results. We generally don’t like to depend too much on analyst optimism coming true, and so we’d tend to lump it with Yamana as more speculative buys.
The most expensive of the five miners we consider here is the $10 billion market cap global company Eldorado Gold Corp (NYSE:EGO). It carries a forward P/E multiple of 19, suggesting that even after 2013 it should need good earnings growth to justify its current valuation. It saw a net income decline much in line to these other companies in its most recent quarterly report- 38%- so we don’t think it deserves that much of a premium.
We’d recommend that investors who are interested in gold miners start by further analyzing Barrick. Not only is it cheap on a forward basis, it actually looks good in the context of its historical results as well while its peers are generally dependent on seeing stronger demand to deliver better financial performance.
