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Holly LaFon
Holly LaFon
Articles (8062) 

Out of Favor Industries and the Gurus That Love Them

For most value investors, an out-of-favor industry is a bargain bin containing potential hidden gems. This mentality is what sent Bruce Berkowitz swashbuckling into financials on the tail of the financial crisis, and prompted Donald Yacktman to buy good “old tech” companies in 2011 when the market considered them a lost cause, for example.

While in recent days the Dow is hitting all-time highs, there are still some sectors that have felt the lift significantly less than others. The industry with the greatest number of stocks at three-year lows is Metals & Mining, which has 39 such companies. According to Guru Stocks at Three-Year Lows (a premium feature), the stocks from the sector that are within 10% of their three-year lows and had the greatest number of Gurus buying them last quarter are: Newmont Mining Corp. (NYSE:NEM), Gold Fields Ltd. (NYSE:GFI), Barrick Gold Corporation (NYSE:ABX) and Anglogold Ashanti (NYSE:AU).

While the growth in the price of gold has slowed recently, gold miners’ predicament has been much worse. In the last five years, the Market Vectors Gold Miners ETF (GDX) lost almost 30%, and dived 29% over the past year as well. By comparison, the SPDR Gold Trust EFT (GLD) was up 60% and down 5.84% over the same periods.

Though short-term performance is typically less meaningful to value investors, the ETF had an unusually good day on Wednesday, soaring more than 4% after months of losses.

The stock nearest its three-year low that is owned by the most Gurus, Newmont Mining, saw its stock fall 32% in the last year. The company was plagued by higher labor costs and higher diesel costs throughout the year as cost applicable to sales (CAS) increased at most of its mines. Labor in 2011 and 2012 accounted for 50% of the company’s CAS.

Newmont’s CAS was $591 per ounce of gold in 2011, and $677 in 2012. Its CAS on copper almost doubled, from $1.26 per pound in 2011, to $2.34 per pound in 2011.

The high Guru ownership may have to do with its dividend, which is the highest in the industry and linked to the price of gold. It will pay a $0.425 dividend per share in the first quarter of 2013, a 21% increase over the prior-year quarter.

The stock was purchased by Paul Tudor Jones in the fourth quarter of 2012, and Gurus who added to their existing holdings include John Hussman, Third Avenue Management, Brian Rogers, Ray Dalio, Steven Cohen, Donald Smith and Jim Simons.

The Guru that increased his position the most in the fourth quarter was John Hussman, who grew it by 542.7%, buying over 1 million shares and placing the stock at a 1.8% weighting in his portfolio.

Jean-Marie Eveillard’s First Eagle Investment Management has the largest stake, with about 6.3 million shares, equal to 1.28% of shares outstanding, a holding he increased by less than 1% in the fourth quarter. It was the seventh consecutive quarter he increased his holding of Newmont:

First Eagle noted in their fourth quarter letter that another miner, Newmont Mining Ltd. (NYSE:NM), was the largest detractor to their Global Fund’s performance over the quarter, followed by gold bullion, and commented:

We do not take a directional view on gold and we recognize that its price will fluctuate based on the strength of the human made financial architecture—but we believe that gold continues to be a real monetary alternative and as such provides us with a potential hedge against extreme outcomes.”

Another stock, Anglogold Ashanti Ltd. (NYSE:AU), is the mining stock near its 52-week low that had the fourth greatest number of Gurus starting new positions in it in the fourth quarter, and that is the most represented in Gurus’ portfolios. Five Gurus purchased the stock last quarter, and it has a 12.77% weighting in Gurus’ portfolios.

In the past 12 months, Anglogold, the world’s third-largest gold producer, lost about 41% of its market value, and has a price of $24.43 on Wednesday afternoon.

The two new buyers of Anglogold in the fourth quarter were John Burbank and Jeremy Grantham, and John Hussman and Steven Cohen added to their holdings. At 1.7%, Burbank now has the second-largest portion of his portfolio invested in Anglogold, following John Paulson, who has been selling shares for the last seven consecutive quarters.

Burbank, who looks for undervalued companies within sectors he thinks will do well, has 48% of his portfolio invested in basic materials, a sector that includes the metals & mining industry. At quarter’s end he had 16.58% of his portfolio in miners.

Burbank told Bloomberg Jan. 23, 2013 that he was cautious on global growth and liked “very few gold names.”

In addition to the higher costs plaguing the industry, beginning in September 2012, Anglogold faced labor strikes and unrest in its South Africa mines, which halted production at six of them for more than a month. The company estimates that the strike cost it 250,000 ounces of production during the fourth quarter.

In February 2013, the company announced annual earnings of $924 million, its second-highest ever, which would have been $208 million higher if not for the strike. In the prior-year quarter it had net income of $1.3 billion. The company also continued to have the highest returns on capital of all major gold companies.

John Paulson, who was vocal about his bullishness on gold miners last year, reduced his weighting in the metals & mining industry for the third consecutive quarter, down to 11.27%, from its 16.24% peak. Anglogold was one of the three stock ideas he presented at the 2012 Ira Sohn conference, saying its low price represented an opportunity and it should be 75% higher if valued like its peers.

Anglogold currently has a P/E of 12.91 and P/B of 1.6, which are both near 10-year lows. Its P/S of 1.48 is close to a three-year low, and its dividend yield of 2.19% is close to a five-year high.

Screen for more stocks within undervalued industries using the All-in-One Screener here, or the Stocks at 3-Year Lows Screener here. Both have Premium Feature components.

Rating: 3.9/5 (7 votes)


Bob_in_Maryland - 4 years ago    Report SPAM
Rick Rule is seeing a similarity with those conditions that prevailed in 1992 and in 1999; describes the present state of precious metal mining to that of capitulation with the industry, overall. It would be wise, I believe, to look for strong managements that can demonstrate cost effectiveness when it come to PM extractions. Companies with strong balance sheets and strong institutional support should do just fine. The guru's must believe that this is offering a great opportunity? Believe the attention can only increase as we proceed. Will want to pay close attention to capex programs; conference calls; presentations.


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