Like Equities? Go Where the Money Is…

equitiesI still think that investors need to be looking for value in this stock market. Investment risk is too high to warrant chasing after high-flyers. For speculative investors, the two best sectors of this market continue to be mining shares and U.S.-listed Chinese businesses. The earnings are still coming in from these two groups and, from my perspective, they’re mostly strong.

Mining stocks are obviously attractive—commodity prices are going up. And with this price strength (both in commodity prices and share prices), mining companies are raising more capital to expand.

In this sector particularly, it’s useful to be working with a brokerage firm that is doing financings and has research for you to consider. While you might think that the mining industry (and Wall Street) can be fly-by-night, it’s actually more difficult for Street analysts in mining to flub their earnings estimates over other industries. A great deal of engineering and consulting analysis is done by mining companies and the reporting standards for mineral resources and production estimates are very high. Typically, a Wall Street analyst will go visit a mine, collect all the data from engineers and consulting firms, and then aggregate the information into a research report with estimates on cash flow and earnings. While the numbers can’t be real, you’re far more likely to get a reasonable estimate about a mine’s production than you are earnings from a technology company.

Speculating in mining shares takes some expertise and patience. But, in an upward commodity price cycle, returns can accelerate quickly, just based on the spot price of the metal itself. Company fundamentals don’t have to improve at a mining business if commodity prices are rising.

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I think that, with the current backdrop in global capital markets, a risk-capital allocation to mining shares is a good bet. I’d put together a basket of junior mining shares equally split among several positions.

One thing that’s bound to take place over the coming quarters is merger and acquisition activity in this sector. There’s so much money floating around the mining industry now that consolidation among the best players and properties is highly likely. In fact, it’s already happening.

Like I mentioned, the likelihood of successful speculation in this sector of the stock market is aided when you work with a brokerage firm that raises money for miners. This isn’t an endorsement by any means, just my experience. Wall Street exists to make money for itself. In this case, it’s worth playing the game.