Is Silver Wheaton a Good Stock to Buy?

Gold and gold miners get a good deal of attention from investors who want to invest in precious metals, but what about silver? Over the last two years Silver Wheaton (NYSE:SLW) has returned 55% against about 30% for the GLD ETF and a decline in the GDX ETF which tracks gold mining companies. Over the last five years the silver miner has nearly tripled, narrowly beating GLD and far ahead of GDX. Past performance is no guarantee of future returns, but it is possible that an investor who wants exposure to precious metals but would like that exposure to come in the form of an operating company should pick silver over gold.

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Silver Wheaton narrowly beat analyst revenue and earnings expectations in their results for the second quarter, though earnings were slightly down compared to a year ago.  The company also raised its expectations for future production and now believes that its 2016 output will be nearly double the amount of silver it produced last year. Sell-side analysts continue to think of Silver Wheaton as a good investment. It trades at 20 times trailing earnings, which is not particularly low, but earnings projections give it a forward P/E of 15 and a five-year PEG ratio of 0.8. Obviously, these valuation statistics are sensitive to silver prices, but presumably an investor in the company would expect silver to perform even better than the assumptions in analyst projections (and even if silver prices meet Street expectations the stock could prove to be a good value).

Hedge funds have been fairly cool on Silver Wheaton, despite the significant attention gold miners have gotten from funds such as Paulson & Co. Renaissance Technologies, managed by billionaire Jim Simons, reported owning 1.1 million shares of Silver Wheaton at the end of the first quarter; this was more than double what Renaissance had owned at the beginning of the year (see more stock picks from Renaissance Technologies). Peter Eichler Jr.’s Aletheia Research and Management (find other stocks in Aletheia’s portfolio) was the only other fund tracked by Insider Monkey to report a position worth over $30 million. Aletheia reported a position of about 900,000 shares.

We’d like to compare Silver Wheaton both to its peer silver miners but also to the gold miners that get more attention as investment opportunities. On the silver-focused side, smaller companies First Majestic Silver (NYSE:AG) and Coeur d’Alene Mines (NYSE:CDE) trade at forward multiples of 10 and 8 respectively, with analysts expecting particularly high growth from Coeur d’Alene despite a 41% decline in earnings in its most recent quarter compared to the same period a year ago. This decrease in light of the fact that Coeur d’Alene has to grow to justify its valuation would lead us to rule it out. As for the other two, First Majestic is cheaper but smaller. As far as gold miners, Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG) are fairly or low priced when compared to earnings estimates, with forward P/E multiples of 7 and 14 respectively, but are also seeing large declines in earnings in recent quarters compared to 2011. On a quantitative basis these gold miners also look fairly cheap and we can certainly understand why Barrick- whose trailing P/E is 9 and so only needs to tread water to remain a good value- would be a better buy if an investor expects gold to outperform silver or even for the two metals to deliver similar economics for mining companies. However, we would encourage investors not to define precious metals as gold and gold alone- if a trade is in search of inflation protection or wants to speculate on the possibility of further quantitative easing in the U.S., silver miners can also make for good investments.