Fishing for opportunities in battered sectors can be a frustrating experience.
Just because a particular sector or industry has seen difficult times and prices have declined to bargain levels does not necessarily mean a turnaround is imminent. Quite often, things continue to worsen for a period of time and the bargains become even cheaper before things begin to improve. This is particularly true in commodity related industries like gold mining where no level of corporate efficiency can offset declining prices of a product. A company can cut costs and even improve production levels, but if the commodity itself is falling, it is going to be tough to make money.
There are a few ways to spot a possible bottoming process in an industry.
When private equity money begins to show up in a sector, it is often a sign that asset price declines have begun to slow and a turnaround may be close. These investors have a good nose for value and the patience for things to turn around so it is more of a near bottom indicator than any absolute sector call. This can be a good sign that it may be time to bargain hunt.
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In 2014, there have been many private equity firms taking interest in the gold miners.
Waterton Global Resource Management just closed its second PE fund at $1 billion to invest in mining opportunities. Apollo Global (NYSE: APO), one of the biggest private equity firms in the world, has hired executives with mining experience and are starting to look for deals in the sector. TPG Partners has invested $500 million in X2 Resources a gold mining specific fund.
Brookfield Asset Management (NYSE: BAM) Private Equity Managing Partner Peter Gordon has said that his firm is devoting more time to looking for bargains in the gold miners. According to a recent Bloomberg article, there is about $8 billion of gold miner targeted private equity money looking for a home right now.
Related Link: Why Deep Value? Because It Works
Another way to spot a potential turnaround in a sector is to watch for the deep value money to show up and begin buying shares of companies in the sector.
These successful investors tend to be early and also have more private equity like time frames than most investors, but they have a fantastic track record of spotting bargains. For several quarters now, these super investors have been buying gold miners and long term investors might be wise to follow their lead.
Allied Nevada Gold (NYSE: ANV) is a gold mining company with operations in Nevada that has attracted the attention of some of these smart, patient investors. Third Avenue Management (Trades, Portfolio), the deep value investing firm run by Marty Whitman, has been buying the stock for several quarters and now owns almost two million shares of the company.
Allied Nevada is certainly cheap as the stock trades at just 40 percent of book value right now. John Paulson (Trades, Portfolio)'s hedge fund also owns more than 1.5 million shares of the gold miner.
Donald Smith (Trades, Portfolio) & Company is a value firm that focuses on those stocks that trade in the lowest decile of price to book value ratios. The firm has been an active buyer of gold mining shares in the past six months as the stocks have fallen in value.
The firm has bought shares of New Gold (NYSE: NGD), Primero Mining (NYSE: PPP), Yamana Gold (NYSE: AUY), Allied Nevada (NYSE: ANV) and other mining companies at bargain levels. It has also been active in the silver miners and owns shares of Couer Mining (NYSE: CDE) and Pan American Silver (NASDAQ: PAAS).
Gold mining stocks have been hit hard as the price of the metal has fallen.
Many of them now trade at significant discounts to their asset value. The smart, patient money is starting to show up in the sector as both private equity and deep value investors are starting to buy assets and companies in the gold mining business.
At some point in the next five years or so, there will be a big rally in the precious metals and patient buyers should be rewarded with spectacular returns from gold mining stocks purchased while they are cheap and out of favor with mainstream investors. The industry continues to present opportunities for value-investors who can weed through the daily noise of the market. A perfect example is the 3 Low Risk, High Yield Stocks that Tim Melvin identifies as the trades of the decade.
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