One of the most successful trading strategies is to buy 52-week highs to ride steady trends. However, this strategy is less sound in specific sectors.
Gold is one of those sector outliers, where traders may be better off looking at the 52-week lows than targeting the 52-week highs. This is because the group is crowded and expensively valued at the highs but loathed, trading at discounts to book value at the lows.
There is one name that stands head and shoulders above its gold sector peers from a quality standpoint, Agnico Eagle (AEM).
This spike in bearish sentiment and steeply discounted valuation looks to be setting up a very rare buying opportunity.
A Cut Above Its Gold Sector Peers
Agnico Eagle is an $18.2 billion gold producer with 11 mining operations in Canada (Quebec, Ontario, Nunavut), Mexico, Finland, and Australia (Victoria).
The company recently merged with Kirkland Lake Gold to add three of the most profitable gold mines to its portfolio, increasing its production from 2.1 million ounces in 2021 to 3.3 million ounces this year.
However, unlike its larger peers struggling to grow, the company has a path towards increasing production to 4.3 million ounces by the end of the decade.
This means that while it will benefit immensely from higher gold prices, it will still enjoy meaningful cash flow and earnings per share growth even with flat to lower gold prices.
During the most recent quarter, the company increased revenue by 40% year-over-year, helped by the merger, and it is on track to increase revenue by more than 50% year-over-year in Q2 2022 despite a slight decline in gold prices.
This is helped by adding Kirkland Lake’s three mines with average costs below $850/oz, translating to 50% margins.
The worry is that this revenue increase will be overshadowed by margin pressure, especially after miners have started the Q2 Earnings Season by reporting earnings misses.
However, Agnico is unique from a cost standpoint; its operations are less sensitive to oil/gas prices, benefiting from hydroelectricity.
Additionally, it has a better employee/contractor ratio than its peers, lessening the blow from labor inflation.
So, while there are worries of a cost blowout that will impact earnings per share, I am cautiously optimistic that the sector’s issues do not extend to Agnico Eagle.
The Fundamental Case
In the past, making a case for owning Agnico Eagle was not easy, with the stock always trading at a premium valuation to peers, similar to Amazon (AMZN) and Apple (AAPL) in the technology sector.
However, given the massive decline in the sector due to despair, which has led to weakness in Agnico, the stock now trades at less than 7x FY2022 cash flow estimates vs. a historical cash flow multiple of 19 (20-year average).
Meanwhile, from a Price to Net Asset value standpoint, Agnico trades at less than 0.80x P/NAV, its lowest level since 2015, despite adding three phenomenal mines to its portfolio. This discounted valuation is a huge disconnect and is unlikely to persist.
The Technical Case
Understandably, some investors might be gun-shy about buying AEM at current levels, with the stock trading below its 50-day and 200-day simple moving averages.
However, as discussed earlier, the best time to buy gold miners is when they’re visiting new 52-week lows because it’s often the time of maximum pessimism.
Besides, with Agnico Eagle’s earnings on deck this week (Wednesday after close), this looks like an opportunity to pick up the stock on sale ahead of what could be a major rally if it manages to meet or beat estimates.
The reason is that the stock looks priced for a massive miss on earnings at its current valuation.
The Bottom Line
Even if we use a more conservative cash flow multiple for AEM of 13 (historical average: 19) to account for the recent downtrend in gold prices (rate hike worries), the upside case is very attractive.
The reason is that I see a fair value for the stock of $72.80, more than 85% upside from current levels.
Combined with a 4.1% dividend yield, I have never seen the stock more attractively valued in my 15 years of trading this sector outside of a single day during the March 2020 Crash.
Hence, I see AEM as a strong buy at $39.00 per share for value investors with an iron stomach willing to embrace volatility.
The above analysis of Agnico Eagle (AEM) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Is Agnico Eagle (AEM) A Buy or Sell?
Based on MarketClub’s technical analysis tools, Agnico Eagle (AEM) is in a strong downtrend that is likely to continue. While AEM is showing intraday strength, it remains in the confines of a bearish trend. Traders should use caution and set stops.
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