The stock market continues to surge higher, with resources stocks leading the way, just like we told you they would.
Gold stocks have been left behind, but we think that’s all about to change
“The One Stock To Buy Today.”
It was one of our most popular emails ever. Thousands of people were obviously keen to find out the name of this great stock. We will remind you of its name a little further down in this email.
We also give you details of one of our current favourite stocks – a large gold mining company in the enviable position of having too much gold.
But before that, let us remind you of the fortunes people have made by investing in just one stock. For example
Case Study #1
People who have held Commonwealth Bank shares since their flotation and have taken their dividends as new shares would have almost double the number of shares they first started with. Therefore, a person who bought 4000 shares at their initial flotation price of $5.40 would now be sitting on roughly 8000 shares.
With the Commonwealth Bank share price now around $55, their initial investment of $21,600 would now be worth around $440,000.
Case Study #2
As reported recently in the Australian Financial Review (AFR), Dubbo builder Robert Healy and his wife bought 13 million shares in Paladin Resources at between 2 cents and 5 cents a share. According to the 2006 annual report, he hasn’t yet sold down. The shares trade today at around $8, meaning his 13 million shares are now worth around $100 million.
Case Study #3
In 1957, Bill and Dr. Carol Angle attended a class on investing, hosted by an aspiring young money manager from Omaha, USA. Dr. Carol recalls “He had us calculate how money would grow, using a slide rule. He brainwashed us to truly believe in our heart of hearts in the miracle of compound interest.”
Persuaded, the Angle’s decided to invest US$30,000 – half their life savings – into the hands of this money manager.
The young money manger was Warren Buffett. Today, the Angle’s family holdings in Buffett’s Berkshire Hathaway have multiplied into a fortune worth around US$400 million.
This Is The One Stock We Told You To Buy
As you can see, some people have become very wealthy by buying shares in just one company.
The one company we told you to buy was BHP Billiton.
It wasn’t the first time we told you about this stock.
It won’t be the last time either.
When we sent that email, BHP Billiton shares traded around the $31 mark. Today they trade around the $38.80 mark, an increase of over 25%*. Not bad going in around 6 weeks, and we think you’d agree.
(Based on share price on July 10th 2007)
We believe that BHP Billiton’s run is only just starting to gain momentum, but that’s another story.
The US Dollar, China and Commodity Prices
Despite that, we’re worried.
They say the stock market climbs a wall of worry. But that’s not why we’re worried.
They say the US dollar is going to continue to decline in value. But that’s not why we’re worried.
They say that the Chinese boom will end in tears. But that doesn’t worry us.
They say that commodity prices will fall. Again, we’re not worried.
Here at Fat Prophets, we enjoy going against the crowd. Over the years, our big calls and our ability to pick the right stocks has given subscribers to our Fat Prophets Reports the opportunity to substantially profit from our expertise.
Just take a look at the returns from our hypothetical portfolios from inception to 30th March 2007
Fat Prophets Australasian Report – 30.7%* annualised return.
Fat Prophets Mining & Resources Report – 32.3%* annualised return.
To put that into perspective, $20,000* growing at 30%* per annum would be worth close to $75,000* in 5 years, over $300,000* in year 11, and hit the $1 million* mark after 15 years.
Whilst we can’t promise that sort of performance in the future, what we can absolutely guarantee is that we’ll continue to search high and low for the best stocks to recommend to our Fat Prophets Members.
“It’s So Obvious”
So what are we worried about?
Frankly, too many people are thinking the same way as us.
That’s what makes us worried.
Six weeks ago, we labelled BHP Billiton as the one stock to buy.
This weekend, the AFR reported on an in-house briefing to the Credit Suisse sales team from incoming BHP Billiton chief executive Maruis Klopper.
The report said
“In a note titled ‘It’s so obvious!’, the Credit Suisse crew repeated BHP’s long-held view that we are in a multi-decade upswing in structural demand for commodities with restrained supply from the mining industry.”
Although it seems Credit Suisse are arriving a bit late to the party, the good news for them is that we think the party is only just getting started. The difference is that Fat Free readers who took our advice and bought shares in BHP Billiton 6 weeks ago are already ahead of the game and sitting on a nice 25%* profit.
The Resources Boom Set To Last For Decades
We’re worried because right now, instead of going against the crowd, we are the crowd. Or at least it feels like a crowd.
Last week we said
“There is no doubt in our minds that the world is in the midst of a resources boom that will last for decades to come.”
We believe there are some simple but fundamentally sound reasons for the sustainability of the current resources bull market. Put plainly, they relate to the laws of supply and demand.
We see a scarily familiar pattern emerging for nearly all commodities. We have rising demand from the likes of China and India combined simultaneously with relatively few new commodity supply sources on the horizon.
To us, this spells further rises in commodity prices. That should benefit the existing mining and resource majors like BHP Billiton and Rio Tinto, both of which trade at very modest valuations today.
BHP Billiton – Still Cheap
In some ways, it’s nice to have someone agree with you. It gives us a warm and fuzzy feeling
for about a minute.
Then we get worried. If too many people agree with us, won’t that mean a correction might be just around the corner? After all, as Warren Buffett said
“You pay a high price for a cheery consensus.”
But then we look back at BHP Billiton. The shares trade on a forward P/E of 12 times. We think that’s still too cheap. Why?
By increasing their volume growth and with some help from increasing commodity prices, we think over the long-term BHP’s profits will steadily and substantially increase.
If that is right, if the share price doesn’t move or even falls, the shares will look cheaper and cheaper. Eventually buyers will likely come in and push the share price even higher.
But in our opinion, the more likely scenario is that the shares keep moving upwards, perhaps substantially so as they are re-rated by the market, and then continue to rise steadily as they track higher BHP profits over the years and decades ahead.
The Mining Giants Cannot Meet Demand
It’s one thing having people agree with you, but it’s quite another if people are simply backing up what you’ve been saying.
“The market is extremely tight,” says Sam Walsh, Chief Executive of Rio Tinto’s Iron Ore Group. “Quite frankly, we can’t meet demand.”
As we said earlier, BHP have effectively been saying the same thing.
Strong demand and restricted supply means only one thing – higher prices.
So why is it only taking until now for others to cotton on to the resources story? To cotton on that it is going to run for decades and is not just a cyclical blip?
You better ask them, because it has been obvious to us for quite some time now, and it should have been obvious to others too.
All we can suggest is that others have been looking out the rear view (investing) mirror. In the past, commodity prices have been cyclical. The time to buy resources shares has been when commodity prices are low.
Because commodity prices are considerably higher today than they were a few years ago, many people think commodity prices are high. Conventional wisdom has said that is the time to sell resources stocks, not buy them.
The Time To Buy Resources Stocks?
But, consider this
- Rather than being high, what if commodity prices are just getting back to equilibrium from their unsustainably low levels of a few years ago?
- What if, as we think, the world is experiencing a once-in-a-century boom via China? The country is undergoing unparalleled industrialisation, with an enormous rural migration to cities. This from a country of 1.3 billion people.
- The world’s major oil fields are maturing rapidly. Indeed, so much so that production from big fields is declining by 16% annually. But it takes years to find, develop and successfully produce from a world-class oilfield and there are no easy and quick fixes. What do you think that might mean for the oil price?
- Rather than it being a time to sell resources stocks, could it be a time to buy?
The Resources Boom Is Only Just Beginning
Long-time Fat Free readers will know we think the resources boom is only just beginning.
That’s not just idle talk either. We’re putting our money where our mouths are with our predictions. Just take a look at some of our key commodity price targets
You will note the current prices of oil and uranium are getting inexorably closer to our targets. We made our predictions some time ago, so it’s nice to see us looking more right than wrong on two counts. It gives us that warm and fuzzy feeling again
but again only for a minute.
Gold is obviously the odd one out. Instead of getting closer to our target, the current price has been moving in the opposite direction – down.
Gold Price Headed To US$1,000
But it does give us a degree of comfort. With gold, we’re going against the crowd again. That makes us feel better. Being contrarians, we’re far more comfortable being the odd ones out.
It may happen this year, it may happen next year or maybe even the year after, but we believe it’s just a matter of time before the gold price hits US$1,000. And the great news for you is that the rest of the financial community hasn’t yet cottoned onto it!
They will eventually, but likely only after the gold price has already risen substantially and they have jumped on the bandwagon that little bit too late. Meanwhile, we’ll just carry on in our own merry little way, looking for gold stocks to recommend to our Fat Prophets Subscribers.
Gold – A Great Buying Opportunity
Earlier this year when the oil price was threatening to fall back through US$50 a barrel, investors sold oil stocks down. The sector was definitely unloved and this piqued our contrarian instincts.
Over the next few months we recommended a number of oil sector plays to our Fat Prophets subscribers. As they have seen, the subsequent improvement in the oil price has resulted in a re-rating of the sector.
Today we find ourselves in a similar position with gold and gold stocks. While the stock market in general has performed strongly this year, gold has failed to surpass its recent high of US$730 an ounce, reached back in May 2006.
But in our view, the consolidation of the gold price over the past 14 months is nothing unusual. We believe the current period merely represents a pause in the longer term upward trend.
With that in mind, we see the present uncertainty and aversion towards gold and gold stocks as a great buying opportunity.
The Next Big Gold Mining Stock Winner Is
Our favoured gold stock has an impressive production profile and low cost structure. Furthermore, compared to similar sized North American gold miners, the stock remains cheap.
Like BHP Billiton, this is a well known company, and a large one at that. You may have even heard of it. As we’ve seen with BHP, rather than digging around amongst minnows trying to find the next big thing in gold, the perfect stock may actually be staring you in the face.
Here’s what we like about this gold company
- We think the consolidation in the gold price over the past 14 months is nothing unusual, and we believe the current period merely represents a pause in the longer-term upward trend.
- From a charting perspective, the stock’s long term outlook is promising. Once the current phase of consolidation is complete, we believe there will be a rejuvenation of longer-term upward momentum. This will target the all-time high of May 2006 at $3.64, and levels beyond here will be achievable in the coming months.
- Their gold resource is a massive 40 million ounces, including 20 million in reserves. Because of this huge deposit, they don’t need to invest too much on the exploration front.
- So big is their gold resource that they are in the enviable position of having too much gold and not enough processing capacity. That’s what we call a nice problem to have!
- They are unhedged to the gold price and debt free, and therefore leveraged to higher gold prices whilst carrying lower financial risk. In our opinion, all these attributes add up to an outstanding investment opportunity.
- The recent gold price volatility and poor sentiment towards the sector have resulted in a pull-back in their stock price. However, we see this weakness as creating an ideal buying opportunity.
Our Impressive Track Record
That large gold miner is just one of the many share recommendations contained within our flagship Fat Prophets Australasian Report. In there, you’ll also find our very latest thoughts on BHP Billiton, plus buy recommendations for 14 other companies from a wide range of sectors, including pharmaceutical, biotech and retail.
Not to be outdone, our Fat Prophets Mining & Resources Report has 18 current buy stock recommendations. They range from the very largest mining behemoths all the way down to the absolute tiddlers.
Although we firmly concentrate on long-term gains, in the last 12 months alone we’ve recommended these winning stocks to our Fat Prophets Mining & Resources Report subscribers
Bannerman Resources – Up 287%!*
Arrow Energy – Up 286%!*
Copper Strike – Up 250%!*
(Based on share prices on July 10th 2007)
The Fat Prophets analysts are highly skilled and experienced. As our track record shows, we know how to sort the winners from the losers. In short, we know what we are doing.
Our analysts are often seen on Bloomberg, CNBC, Sky News and ABC television giving expert advice on the stock market. We are regularly quoted in the Australian Financial Review and other national newspapers. When the financial media want an independent opinion, they talk to us.