Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘precious metals’

Investment Theme with Legs to the End of This Decade

By for Profit Confidential

One Domestic Industry That Continues to BoomIf there’s one sector of the stock market still poised for more capital gains, it has to be in domestic oil and gas producers.

This sector continues to be a top wealth creator. Most of the action is in the junior and mid-tier producers, as well as the limited partnerships focused on storage and distribution.

On the other hand, large, integrated producers are running into oil equivalent production issues. Both Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) are good examples, as they are currently dealing with declining production as new projects have yet to come on stream.

EOG Resources, Inc. (EOG) is a large-cap oil and gas producer with an excellent track record of wealth creation for shareholders. In the past, this stock has gotten ahead of itself, but it is still very much a growth story.

The stock’s been getting upgraded after reporting excellent financial and production growth in the first quarter. The position’s already been a huge winner, but within the numbers, there is still very meaningful growth in domestic (U.S.) crude oil production.

U.S. first-quarter production of crude oil grew an impressive 45% to 258.1 thousand barrels of oil per day (MBbld), up from 178.3 MBbld in the first quarter of 2013.

Natural gas production also improved in the first quarter but grew at a lesser rate of 20% comparatively (including U.S. and Canadian volumes).

For a large-cap resource company, it’s worth taking a closer look at EOG’s numbers. Its balance sheet is in very good shape with tons of cash on the books. And its net cash provided by operating activities soared in the most … Read More

My Top Energy Pick with Market-Defying Momentum

By for Profit Confidential

My Top Energy Stock Pick for This Slow-Growth MarketThe strength in this market is with oil, as both the spot price and oil stocks are holding up very well.

While the broader market has been experiencing a well-deserved price retrenchment, both large- and small-cap oil stocks have been on the comeback trail. The price strength is helpful as speculative fervor continues to come out of equities. The performance illustrates how helpful sectoral portfolio diversification can be when asset prices fall.

ConocoPhillips (COP) is not expensively priced at approximately 9.5 times trailing earnings. The stock sold off significantly at the beginning of the year but has since recovered nicely. Currently yielding just less than four percent, this oil and gas story is similar to the other big integrated energy companies: it isn’t about production growth but more about income for investors.

One company we’ve looked at several times in these pages is Kodiak Oil & Gas Corp. (KOG). This is a Bakken oil play that’s really doing well. This stock was consistently expensive, being a highly liquid favorite of institutional investors, but earnings have caught up to the share price and the story is still intact. This junior energy producer still has a very bright future. The company’s stock chart is featured below:

 Kodiak Oil And Gas Corp ChartChart courtesy of www.StockCharts.com

Energy consistently has a role to play in equity market portfolios, and it doesn’t have to be pure-play production stories. In terms of resource investing, I find it much more attractive over precious metals, particularly for investors looking for some longevity in their holdings.

In an environment that’s likely to remain slow-growing for several years, I like both the income and capital … Read More

Stock Market Setting Up for Extended Break?

By for Profit Confidential

Soft Q1 Suggesting Market Set for Extended BreakThe S&P 500 index really hasn’t done much since the beginning of the year but churn…but then again, why shouldn’t it?

For stocks, 2013 was an exceptional year. If we get another positive year on top of dividends, then it’s total gravy.

The capital gains over the last several years have been highly unusual, representative of the gains often seen after a major financial crisis.

There are no bandwagons to jump on in this stock market. Investor sentiment finally had a bit of an awakening over the last several weeks. Big investors booked some profits after the big price recovery in February, which occurred because of verbal reassurances by the new Fed chair, Janet Yellen. If there wasn’t further hand-holding from the Fed, stocks likely would have continued January’s sell-off into a full-blown correction, helped by events in Ukraine.

I’m of the mind that the stock market may take an extended break over the next two quarters, as it’s so often done in the past—probably more of a price consolidation over a correction; top-line growth is still pretty modest.

I’m still a big fan of dividend income and also a higher weighting given to cash within a portfolio context. Very little stands out in this stock market as an exceptional buy. There are some exciting innovations in the marketplace, but valuations for many of these stocks are still way off the charts.

Precious metals continue to prove themselves as an unreliable asset class. Spot prices are stuck and all-sustaining mining costs per ounce are still going up. It’s a tough road ahead for precious metals stocks.

But this is … Read More

The Last Group of Burgeoning Stocks

By for Profit Confidential

The Income Stocks Investors Now CraveQuite a bit of speculative fervor has been zapped out of this market, which is helpful for the longer-run trend.

With the exception of biotechnology stocks, trading action has softened in initial public offerings (IPOs), 3D (three-dimensional) printer stocks, cloud software stocks, and even a lot of restaurant stocks that only recently were very hot.

The stock market is just a continuing cycle of fluctuating investor sentiment. Valuations among junior energy producers got really excessive last year and the entire group now seems to be in consolidation.

Gold and silver stocks appear to have been toast for a while. As is always the case in resource investing, even the best growth stories can’t generally get their share prices moving if the underlying commodity price is stagnant. Precious metals stocks have always traded in manias, and this is not likely to change.

In a slow-growth environment, dividend income is key. And after an exceptional year like 2013, it may just be the only rate of return to be had.

But like so many large-cap stocks last year, some of the best dividend payers have already gone up tremendously. There isn’t a lot of value for an equity buyer these days.

One specific sector that continues to be relatively hot is the master limited partnerships (MLP) of energy companies. There is very good yield to be had from this sector in addition to the potential for capital gains. There have been countless new listings of these securities, and the North American production boom is the reason.

One firm that illustrates the combination of capital gains and income that can be found … Read More

Burning Money at the Rate of $113 Billion a Month; How Can They Stop Printing?

By for Profit Confidential

Why Our National Debt Will Double in the Years AheadIn the month of November, the U.S. government registered a budget deficit of $135 billion. Over the course of the month, it spent $318 billion and only took in $182 billion. So far for the fiscal year 2014, which began in October, the U.S. government has registered a budget deficit of $227 billion; that’s an average of $113.5 billion a month so far this fiscal year. (Source: Department of the Treasury; Bureau of Fiscal Service, December 11, 2013.)

In the same period a year ago (October and November of 2013), the U.S. government registered a budget deficit of almost $300 billion. (I ‘m certain that some politician comparing the two periods will say, “Look, our budget deficit situation is getting better!”)

Whenever the U.S. government registers a budget deficit, it has to go out to the market and borrow money to pay for its expenses and obligations. This increases our national debt, which has skyrocketed over the past few years due to consecutive years of extremely large budget deficits. As of December 10, our national debt stood at $17.2 trillion. (Source: Treasury Direct web site, last accessed December 12, 2013.)

I believe our national debt will double to $34.0 trillion in the years ahead.

Here’s my reasoning:

According to the Congressional Budget Office’s projection, between 2014 and 2018, the total U.S. budget deficit of the U.S. government will add up to about $2.4 trillion. This means that by the government’s own estimates, the national debt will hit about $20.0 trillion in four years. (Source: The Congressional Budget Office, May 2013.)

But I think the budget deficits the U.S. government will … Read More

Investors Borrowing Like Drunkards to Buy Stocks Again?

By for Profit Confidential

silver pricesThis morning we learned sales for this year’s Black Friday weekend declined for the first time since 2009. I have been warning my readers for months that falling consumer confidence would result in a pullback in consumer spending—and that’s exactly what’s happening this holiday shopping season.

According to the National Retail Federation, consumers spent an average of $407.02 from Thursday through Sunday, down about four percent from what they spent last year. (Source: National Retail Federation press release, December 1, 2013.)

The first decline in holiday spending since 2009 does not bode well for the economy, and as far as I’m concerned, it is an early indication of a weakening economy going into 2014.

But there is one place people are spending. In fact, you can say they’re spending so much here, they’re borrowing to buy more!

Investors have borrowed more money to buy stocks than at any other time in history!

The chart below shows the use of margin debt on the New York Stock Exchange (NYSE). It stands at the record-high level.

Margin Debt On New York Stock Exchange Chart

Yes, NYSE margin debt stands above the level it stood at just before the peak in stock prices in 2007 and much higher than it was when the Tech Boom bubble burst in the year 2000. The risk with margin debt is that it can turn a minor stock market sell-off into a major one for key stock indices as investor loans are called.

And while investors are borrowing like drunkards to buy stocks, earnings of companies that trade in key stock indices are anemic. In the third quarter of this year, the “surprise” rate for … Read More

Why This “Other” Metal Looks So Attractive

By for Profit Confidential

As gold bullion prices continue to take a beating because of the belief that the easy money policies of the Fed won’t go away anytime soon, silver prices have fallen into the same rut. Just like gold bullion, the silver market has also become a place where bears prevail.

But in the midst of the negativity towards silver, I see that the fundamentals that ultimately drive silver prices higher are getting stronger.

Demand for silver is robust. Sales of one-ounce silver coins at the U.S. Mint have reached a record for the year, and 2013 still isn’t finished! The table below shows how demand for silver (coins in ounces) has increased at the U.S. Mint since 2007.

Yearly Demand for Silver Coins in Ounces at the U.S. Mint

Year Sales in Ounces % Change
2007 9,887,000
2008 19,583,500 98%
2009 28,766,500 47%
2010 34,662,500 20%
2011 39,868,500 15%
2012 33,742,500 -15%
2013* 41,113,000 22%
Total % change since 2007 316%

* Data as of November 28, 2013
Data Source: U.S. Mint, Sales & Figures, last accessed November 28, 2013.

Notice on the table above how demand for silver coins at the U.S. Mint this year has already surpassed the level seen in 2011—a time when silver prices were at about $50.00 an ounce.

Rising demand for silver is just one reason why I am bullish on silver prices. But I have another reason, too, as to why I expect silver prices to rise ahead.

While there have been some comments among economists that the Federal Reserve will start pulling back on printing paper money in 2014, the Fed has printed … Read More

Despite Consolidation in Oil Sector, These Junior Oil & Gas Stocks Have Momentum

By for Profit Confidential

Oil in Consolidation, but Momentum Remains in Junior Oil & Gas StocksThose interested in the oil business will know that smaller stocks in the sector have mostly been doing very well, even as the spot price of the commodity dropped below $100.00 a barrel.

The run-up has been pronounced in a number of companies, likely in anticipation of third-quarter earnings. Oil stocks advancing on declining spot prices is a very unusual development in the resource sector. But there is definitely an appetite out there among institutional investors for junior oil and natural gas producers.

One company we looked at previously is Kodiak Oil & Gas Corp. (KOG). This Bakken oil play reports tomorrow, and expectations are high.

Wall Street consensus is for Kodiak to generate sales growth of around 150% in its upcoming quarter. Earnings have the potential to double over the third quarter of 2012.

Company management recently announced its full-year 2013 average daily production will be approximately 30,000 barrels of oil equivalent per day (boepd). This compares to an average of 14,000 boepd in 2012. This year’s exit production rate is currently estimated at 42,000 boepd.

So, there’s definitely economic growth in the domestic oil and gas business due to new technology and the willingness of investors to finance junior companies.

Kodiak is trading right at its all-time record high after experiencing a meaningful consolidation throughout 2012 and the first half of this year. The stock is fully priced, which is no surprise. If oil prices were to reaccelerate, this position would be even higher.

Also reporting tomorrow is ConocoPhillips (COP), which is outperforming other big oil companies on the stock market.

ConocoPhillips spun off Phillips 66 (PSX) last … Read More

Why Opportunity Abounds Where the Rest of the Market Isn’t Looking

By for Profit Confidential

Opportunity Abounds Where the Rest of the Market Isn’t LookingIf the trend is your friend on Wall Street, it’s also the case that there are opportunities and value among stocks that have been abandoned by investors.

While the financial media tends to prefer doom and gloom, genuine opportunity in the stock market is rarely in the headlines. The focus needn’t be on what is wrong with the world; we already know that. What’s lacking is how you can profit from it.

Precious metals stocks are becoming more and more attractive these days, but I don’t think we’ve seen a bottom yet in gold and silver stocks.

Currently, some of the best risk-capital opportunities in the stock market are U.S.-listed Chinese stocks. It’s a sector that’s pretty much been abandoned by the marketplace.

The reasons why the marketplace is no longer interested in Chinese stocks are obvious, but at the height of disinterest comes the best prices. By the time interest hits and the story is in the newspapers, most of the money has already been made.

One company that’s experiencing a genuine stock market turnaround is China Ceramics Co., Ltd. (CCCL). And it’s doing so ahead of its financial turnaround, which indicates that investor sentiment is warming to the story.

China Ceramics manufactures and sells ceramic tiles to both residential and commercial customers in China. The company stumbled both operationally and on the stock market due to China’s planned real estate restraint. The position then met the same fate as virtually all other U.S.-listed Chinese stocks that imploded on the stock market because of the plethora of accounting frauds.

But the tide is slowly turning for many of these … Read More

3Q Earnings Results Support Move Towards Major Correction Ahead

By for Profit Confidential

3Q Earnings Results Support Move Towards Major Correction AheadSo far this earnings season, there’s no big revelation among earnings results from brand-name companies yet. With reduced expectations, financial metrics are currently being met.

Earnings from The Charles Schwab Corporation (SCHW) came in solid. The company reported third-quarter earnings of $290 million, representing solid growth of 17% over the comparable quarter.

Sales grew 15% to $1.37 billion, with double-digit growth being experienced in all three of the company’s main revenue sources. Quarterly sales are at a record high, with the exception of the heights reached during the Internet bubble.

Company management sees its profit margins expanding into 2014. The stock jumped on this positive report, but it was already expensively priced.

Johnson & Johnson (JNJ) came in slightly ahead of consensus on both revenues and earnings. Third-quarter sales grew 3.1% to $17.6 billion. Domestic sales grew 1.7%, while international sales grew 4.2%. Diluted earnings per share grew to $1.36, representing another solid gain around 8.8%.

Investors have come to expect outperformance from Johnson & Johnson, and the position just consolidated on its earnings report. This company is worthy of a look for any long-term equity market portfolio, especially during a market correction or when the position is down on its own.

The Coca-Cola Company (KO) performed as expected, announcing a two-percent gain in global volume growth, but a three-percent decline in revenues. Diluted earnings per share grew eight percent to $0.54.

Dominos Pizza, Inc. (DPZ) has been a huge winner over the last three years. In its latest quarter, domestic same store sales grew 5.4%, with earnings coming in at $30.6 million compared to $26.0 million.

The company’s bottom … Read More

While Few See It, This Stock Sector Is Getting Risky

By for Profit Confidential

While Few See It, This Stock Sector Is Getting RiskyThere continues to be excellent activity in domestic oil and gas stocks, especially in the small- and micro-cap categories. Bakken oil stocks are pushing the valuation envelope even further, as many companies are hitting new highs with stronger production and oil prices.

Recently, in this column, I looked at Triangle Petroleum Corporation (TPLM), which bolted higher on the stock market after reporting exceptional growth in production and in its financials. (See “Why the Street Is So Bullish on This Junior Oil Producer.”)

The stock is very expensive, but the price momentum continues; this illustrates the appetite institutional investors have to bid these companies in a rising spot price environment.

Among large, integrated oil and gas producers, the stock market action is much more subdued because of production issues—declining barrels of oil due to field depletion. Dividend yields are fat, but top- and bottom-line growth is becoming a real issue in the face of declining production numbers. The action for risk-capital traders is definitely in the burgeoning junior producers.

But like all hot stocks in resources, the action revolves almost 100% around the spot price. This is especially the case with precious metals, where even the most exciting growth stories won’t experience a rising share price if spot prices of the underlying commodity are subdued. This is a built-in investment risk with all resource stocks, and it is a disincentive for betting on companies as opposed to the spot price itself.

The price of oil is holding up exceedingly well, considering the tapered geopolitical tensions regarding Syria. Whatever the reasons why prices are nudging $110.00 for West Texas Intermediate … Read More

Why the Street Is So Bullish on This Junior Oil Producer

By for Profit Confidential

oil stocksWith all the things going on in the world, it’s a good time to be in the oil business. Bakken oil stocks are almost all high-valuation; but the marketplace knows this, and it’s getting what it’s paying for—there’s big growth among many of these producers.

Everything is relative in the stock market. Valuations among junior oil producers with growing production (on strong oil prices) aren’t comparable to other businesses or industry sectors.

Triangle Petroleum Corporation (TPLM) recently shot way up on the stock market after reporting exceptional growth in production and its financials. This company is developing the Bakken Shale and Three Forks formations in the Williston Basin of North Dakota and Montana.

The stock’s actually been flat over the last two years. Part of the reason for this is that the company has had to sell a number of new shares in order to finance its business plan.

Triangle Petroleum recently reported fiscal 2014 second-quarter (ended July 31, 2013) revenues of $50.4 million, compared to $10.3 million a year ago.

Operating income was an impressive $13.0 million compared to a loss of $1.3 million. Net income was $6.8 million, or $0.12 per diluted share, compared to a net loss of $1.2 million, or $0.02 per diluted share.

The company finished the quarter with 57 million diluted shares outstanding, compared to 44.3 million shares last year.

The tough call in junior oil stocks isn’t knowing which companies are the big growth stories; it’s knowing the spot price of oil, because that’s always what energy stocks trade off. And naturally, you can’t predict the spot price of oil just like you … Read More

Business Stalls for Equipment Manufacturers; Outlook for Precious Metal Companies Flat

By for Profit Confidential

Business Stalls for Equipment ManufacturersOne specific stock market sector that continues to be very challenging is the precious metals mining area. A combination of events has hit the precious metals producers: lower spot prices and rising costs being two of the main factors. It’s been the perfect storm for gold mining stocks, and the trend isn’t over yet.

And with reduced operating margins comes the big squeeze in capital expenditures. This is no more evident than in the well-known mining equipment company Joy Global Inc. (JOY), which has been under pressure on the stock market for the entire year.

Joy Global is a well-known manufacturer of mining equipment out of Milwaukee, Wisconsin. It’s been around since 1884, and like precious metals themselves, the company’s share price is volatile.

In the company’s latest earnings report for its third fiscal quarter of 2013 (ended July 26), total bookings for underground mining machinery dropped a staggering 42.6% to $361.2 million from $629.2 million in the same quarter last year.

The company reported original equipment orders fell 68%, with declines in all regions except China. Aftermarket orders fell 27%, with declines in all regions except North America. Foreign exchange hurt orders for underground mining machinery, which dropped by $71.0 million, according to the company.

Total revenues in Joy Global’s latest quarter fell five percent to $1.3 billion. As noted by the company’s management team, prices for industrial metals and bulk commodities have dropped 20% to 40% over the last 18 months.

Seaborne coal prices have fallen 17% since the beginning of the year, and China’s domestic coal prices have dropped almost 20%. With this backdrop, Joy Global says … Read More

Will a Return to Normalized Interest Rates Halt Economic Growth?

By for Profit Confidential

Will a Return to Normalized Interest Rates Halt Economic GrowthI really don’t expect the stock market to come apart unless there’s some sort of shock. Why? Because many blue chips are trading right around their historical valuations at this time. And with equities in consolidation mode until the next meeting of the Federal Reserve in September, there is not a lot of new action to take.

I have to admit that the stock market is holding up extremely well in the face of declining earnings expectations. Given the anemic rate of growth in the U.S. economy, the next recession is a real possibility within the next 18 months. The catalyst for a technical recession could be rising interest rates that, as we know, have been artificially low for a long time now.

But there are other pressures in the marketplace, too. The spot price of oil is surprisingly strong, given the economic outlook. Some precious metals have also been ticking higher recently. But while there is price inflation in the general economy, it doesn’t show in the headline numbers and it isn’t translating into new spending by corporations. (Many companies experienced revenue growth in the second quarter solely due to increased prices for their products, not increased volume.)

Corporations and individuals continue to be highly conservative with their spending. This is a positive development as corporate and individual balance sheets improve, but it doesn’t help a consumption-based economy.

I continue to believe that this year’s stock market winners will remain that way. Institutional investors want reliability in earnings results, and they want the dividends that blue chips provide. There is not a lot of reliable growth out there, so … Read More

Why This Non-Gold Commodity Is Essential for Your Portfolio

By for Profit Confidential

080713_PC_lombardiAs readers of Profit Confidential already know, I have been bullish on both gold bullion and silver prices. I believe these two precious metals have great futures ahead of them, in spite of all the negativity about them in the mainstream media and their recent price slump—especially silver.

According to the mainstream media, that’s because the Federal Reserve is about to stop pumping money into the economy. The U.S. economy is getting better, and the global economy isn’t doing as poorly as many thought it would. Under those conditions, metals like gold bullion and silver would not be wise investments.

But what many don’t realize is that those conditions are not prevailing. In fact, the fundamentals for increases in the value of gold bullion and silver are actually very strong. And that has reinforced my original belief that increases in silver prices will outperform gold bullion prices.

Here’s what you need to know: silver prices will see an uptick because of the most basic of economic reasons—demand will outstrip supply.

Take a look at the chart below. It shows the number of one-ounce silver coins sold at the U.S. Mint this year compared to the same period last year. Clearly, demand from investors appears to be robust and growing.

2013-Monthly-Silver-Coin-Sales-U-S-Mint

As silver prices declined, investors bought more than 25 million ounces of it in the first half of this year, compared to just 17.3 million ounces in the first half of 2012—an increase of almost 44%.

Keep in mind that the people who buy physical silver are generally not speculators looking for a quick buck. Instead, they buy when the silver … Read More

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