Stocks 50 Times Better Than Gold

If there's a universal truth in investing, it's this: Anytime everyone believes something will happen, the opposite happens. When everyone thinks yin, markets go yang. Just ask the house flipper, the dot-com shareholder, or anyone who "invested" in a Beanie Baby.

When the whole market zigs, you should zag. And right now, the market is practically zigging all over itself for gold, whose price hit a new record high this month. That news caught the eye of a couple of Bloomberg reporters last week, who pointed out that gold had returned only 44% since its last peak back in January 1980.

50 times better
If you're thinking a 44% return for nearly 30 years worth of investment sounds pretty meager, you'd be right. You'd have done better with your money just sitting in a plain ol' checking account. Even more dramatic, consider stocks. If you'd instead invested in the S&P 500 and reinvested your dividends, your investment over the same time would have risen 22-fold. Put another way, you'd have done about 50 times better with stocks than with gold.

That stat gets under the skin of forward-looking gold bugs, who believe that some mix of America's fiat currency, aggressive monetary policy, and epic deficit spending could make for gut-wrenching inflation.

That economic cluster bomb would be a boon for gold and hard assets at large, so the thinking goes, as they'd retain their relative value in the face of extreme inflation.

The best of both worlds
I don't think gold investors are wrong to have those concerns -- just that they're making the wrong trade on them. There's a far better one based on the same concerns.

Consider the following facts:

  1. Gold is only a store of value -- it doesn't spin off cash or pay dividends.
  2. Stocks have crushed gold returns over the long haul.
  3. Dividend-paying stocks have outperformed non-dividend payers.

Returns of dividend-paying stocks haven't just beaten non-payers: They've crushed them. According to robust research by Wharton's Jeremy Siegel, portfolios of the highest-yielding stocks returned 4.8 percentage points higher annually, with less risk than baskets of the lowest-yielding stocks, over the years 1958 to 2002.

Higher returns, lower risk
Pretty simple, and the fact that dividend payers are market-crushers is of little surprise to Motley Fool Income Investor members. But here's where gold comes in. You're concerned about deficit-driven inflation leading to rampant inflation? Fine. But don't invest directly in gold, or even first-tier gold producers like Barrick Gold (NYSE: ABX  ) or Goldcorp (NYSE: GG  ) .

Instead, consider shares of high-quality, high-payout producers of necessary industrial commodities which should also benefit from the same concerns that would benefit from drivers of gold prices.

Think of what an ExxonMobil (NYSE: XOM  ) is to oil, an Ultra Petroleum (NYSE: UPL  ) to natural gas, or a PotashCorp (NYSE: POT  ) to potash. Ah, and what Compass Minerals (NYSE: CMP  ) is to salt. Income Investor's James Early and I like to think of Compass as possibly the best little commodity play you've never heard of.

The best of both worlds
Compass has quietly destroyed the market over the past five years selling two commodities you likely pay no mind to: salt and sulphate of potash (SOP), which is used in high-end specialty fertilizers. Compass is the largest salt producer in the U.S. and the U.K., and it practically mints cash by producing SOP at its low-cost solar evaporation ponds at the Great Salt Lake.

Unlike your typical natural-resource producer, Compass doesn't have to pour cash into finding new reserves: The company estimates it has nearly 100 years of reserves at most of its production locations. Incredibly, the same is also true of its potash reserves. Talk about a store of value. And on the inflation hunt, recognize that Compass has been able to raise prices at 3%-4% a year over the past couple of decades, and it passed on another increase just last week.

Stocks 2010 
Not even factoring in its nifty value as an inflation hedge, Compass boasts three of the key criteria that James and his team at Income Investor seek out:

  1. Big dividends. Not only has robust empirical research proven dividend payers outperform over the long run, but they pay you while you wait. The average Income Investor recommendation yields 4.1%.  
  2. Big upside. We like to have our cake and eat it, too, recommending high yielders with lots of capital gains potential.
  3. Big moats. We're looking for businesses with multidecade staying power. Case in point: Coca-Cola (NYSE: KO  ) , which is one of only six stocks on Income Investor's Buy First list.

Compass is James' recommendation in the Fool's flagship annual special report, Stocks 2010. His recommendation from last year's report, Tenaris SA, which we co-wrote, rose nearly 89% over the year. I think you'll agree we've had a pretty good run with these reports over the years:

 

Average Recommendation's Return

Average Recommendation Outperformance vs. S&P 500

Top Performer

Top Performer's Returns

Stocks 2003

114.4%

88.7%

Quality Systems

996.8%

Stocks 2004

22.1%

16.7%

Alderwoods

139.0%

Stocks 2005

4.8%

11.3%

BioMarin Pharmaceutical

248.8%

Stocks 2006

(11.4%)

2.4%

BioMarin Pharmaceutical

55.2%

Stocks 2007

(30.0%)

(7.7%)

Urban Outfitters

44.9%

Stocks 2008

(1.4%)

21.5%

Marvel Entertainment

82.4%

Stocks 2009

59.0%

47.1%

Netflix

135.6%

Average

22.5%

25.7%

   

Returns data as of 11/5/09.

Two for the price of one
You can read more about Compass Minerals and the nine other stocks featured in Stocks 2010, which comes free with new memberships to Income Investor. The average Income Investor recommendation has outperformed the market by seven percentage points since the service's inception back in 2003. Just click here to try Income Investor -- you can cancel at any time.

Senior Analyst Joe Magyer's favorite metal is Rearden metal. He has no financial interest, long or short, in any companies mentioned in this article. Or gold, for that matter. Coke is both an Income Investor and Inside Value recommendation. Marvel, Netflix, and Quality Systems are Stock Advisor selections. BioMarin is a Rule Breakers pick. The Motley Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (66)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 14, 2009, at 4:57 PM, kurtdabear wrote:

    If you're going to do an analysis of comparative investments, do an analysis; don't cherry-pick.

    You started out measuring gold over a 30-year span from its last peak to the present, but then you concluded with a 7-year list of your stock recommendations.

    Why didn't you include gold in the 7-year investment sequence?

  • Report this Comment On December 14, 2009, at 6:16 PM, TMFJoeInvestor wrote:

    @kurtdabear

    I think the 30-year data is a fairly robust presentation of returns between gold and stocks, and certainly more representative than how any one of the Stocks OX reports performed against gold.

    The greater point was that, one, over the long run, investors have had much more success with stocks than gold. And, two, that you can still have your cake and eat it too when it comes to inflation concerns by investing in strong, competitively advantaged producers of necessary industrial commodities. For that matter, you could extend the argument to include businesses with valuable IP and pricing power – Monsanto springs to mind – who have the ability to jam through price increases pretty much at will.

    If your gold thesis is that that we’re headed back to a gold standard here in the States, I can’t do much for you. It is difficult to imagine such a scenario playing out any time in the remotely close future, and I suspect such a calamity occurring would only serve to crush the price of gold, as well. (Witness gold’s fall this past November when the financial engine of our economy seemed to run out of gas).

    In any case, I appreciate the feedback, and certainly welcome more of it!

    Joe

  • Report this Comment On December 14, 2009, at 6:44 PM, MellowGuy1 wrote:

    One can get an income by holding gold. Buy GLD shares and sell calls against it.

  • Report this Comment On December 14, 2009, at 7:52 PM, TMFJoeInvestor wrote:

    @MellowGuy1

    Well, that's true, but you're also taking on a lot of transaction costs (commissions and spreads) in doing so, not to mention upside potential if GLD spikes above your strike price.

    Also, I'd keep in mind that while with a dividend payer such as Compass you're receiving a quarterly stream of dividends in exchange for your investment, you're actually paying out a carrying cost for your gold. So, not only does gold not generate cash, but you're actually paying someone to hold onto it for you. That's like an anti-dividend.

    Joe

  • Report this Comment On December 14, 2009, at 9:11 PM, henryking54 wrote:

    "Specialty salts and fertilizer maker Compass Minerals International Inc (CMP), which depends on the severity of winter for the sale of its de-icing salt that clears snow, could be hurt as high costs and state and local budget may crimp demand, Barron's said citing Short Alert, a small North Carolina research firm.

    Nat Guild, managing partner of Short Alert, said the stock is worth about $12, much less than the current $55.40."

    http://uk.reuters.com/article/idUKN0522108620090705

  • Report this Comment On December 14, 2009, at 10:16 PM, jm7700229 wrote:

    At last! someone agrees with me. Gold has no intrinsic value -- only what people are willing to pay for it. I just don't see it as a hedge against inflation when compared to solid, well managed companies in good businesses. Inflation works equally well for them and they earn money in the meantime.

    I don't believe gold can be valued; therefore, it can't be a secure investment. I think the recent runup overpriced it relative to the world's need for it -- a speculative bubble. I think the bubble will burst. I could be wrong, but I retired in comfort by being right more often than not.

  • Report this Comment On December 14, 2009, at 11:46 PM, RobertC314 wrote:

    @hentryking,

    Perhaps there is some subscription service at Short Alert that tells you a reason they value CMP at $12 (by the way, that article was written in July, CMP is up to about $68 since then... how are those shorts coming?). Having a cyclical business environment (i.e. severe winters) is not a reason to devalue a stock.

    With over a 2% dividend (at today's price) and a PE of just 12, and good results on almost every other valuation statistic I think everyone could greatly benefit for any rational reason for such a valuation.

  • Report this Comment On December 15, 2009, at 12:15 AM, johnis9 wrote:

    Good post, i always was of the feeling that Gold is being glorified more than it deserves, The uses of gold is minimal compared to other precious metals and some mystic reasons are cited for its increase.

    http://bit.ly/NaturalGas9

    I think Natural Gas stocks are one we need to look forward next year

  • Report this Comment On December 15, 2009, at 2:35 AM, JeffMLittle wrote:

    I applaud the original author's attempts to use rational arguments unlike some of the commentators, but I still have to point out that the 22-fold increase is completely irrelevant. The market goes through 30-40 year cycles in which stocks shoot up like a rocket for 20+ years and then go nowhere but sideways for another 15. During the 15 years of sideways stock movement, investing in the rocket period isn't an option and you have to work with what's available now. At this point, commodities have typically been beaten down to a fraction of what they had been a half cycle earlier and typically spend the next period outperforming.

    Personally, I look at the sideways movement as a sign that you need to be more nimble. If the market goes primarily up, then you don't want to trade because you will miss too many of the good days, and the top 8 or so gains of the year will frequently add up to the total annual gain. If the market goes sideways, then you have to take other approaches or settle for less.

    Given the ongoing commodities story, I like gold and gold stocks at particular times. This fits in well with a nimble approach during the commodities decades. When the wind changes directions again in 5-10 years, it will be time to go with buy and hold tech stocks, or whatever the leaders of the next secular bull market are.

  • Report this Comment On December 15, 2009, at 3:40 AM, jennifergmd wrote:

    You guys all use the same stupid argument about gold. That if you bought at the peak in the 80's blah blah blah. The same thing is true about buying at the peak of the stock market or the real estate market. If you had been buying gold a little bit every month just like you do with other investments, you would have killed it the last 10 years. Who says you are going to only buy at the peak? That is the dumbest argument and explains why no one pays money to read your opinions. Just another average joe making an average wage. Can't wait till you are pumping my gas pal.

  • Report this Comment On December 15, 2009, at 6:29 AM, IslandDave wrote:

    Seems to be almost religious-like anti-gold and pro-gold fervor expressed here. Why must a portfolio be exclusively one or the other?

    Why not instead dedicate a slice of it to gold and gold stocks and shift the allocation based on current fundamentals and/or trend (often our friend, eh?), as JeffMLittle indicated. This is what I've been doing for the past six or seven years. Over that time, the precious metals and PM stocks portion of my portfolio has outperformed my non-PM portion, which in turn outperformed the S&P 500.

    To join the party showing selected data which illustrates my point in the best light, compare the S&P 500 change to gold price change (using truthisntstupid figures above) from 2001 to today. I see gold from $272 to $1115 and S&P 500 from 1148 to 1114 (admittedly, this does not account for any dividend income). And for gold stocks, which typically increase at a rate twice that of gold prices, it's been considerably better. Will the trend continue? I certainly don't know. It sure appears fundamentals support it continuing awhile, though (with periodic corrections, of course).

    So, stay away from putting a big chunk into precious metals and PM stocks if for whatever reason you don't believe they'll, ahem, strike gold for you. But ignore them completely at your (portfolio's) own peril. This vein may run much longer and deeper yet.

  • Report this Comment On December 15, 2009, at 4:12 PM, pkluck wrote:

    Regarding CMP this is a fairly expensive price for a salt stock, whats the upside? If you want a hedge buy oil stocks they pay out a hell of lot more than a 2% dividend and have a lot more upside potential. How expensive can salt get? How expensive can oil get?

  • Report this Comment On December 18, 2009, at 1:34 PM, weichert wrote:

    Or, consider anti-freeze. I wish I had put my disposable income in anti-freeze back when it was below $1.00. Who would have thought 900% increase was feasible. So, maybe we will see $2500 gold, but actually

    platinum is much better , says one who lived thru the

    79-80 time frame, and sold silver 90% junk at $22,000

    for a $1000 bag, which I paid $1300 a few years earlier. You will see it again, shortly.

  • Report this Comment On December 18, 2009, at 5:59 PM, mrbill6 wrote:

    I use the stock price calculator at smartmoney.com, which calculates CMP's value much higher than it's current price.

    http://www.smartmoney.com/pricecheck/?story=worksheet

  • Report this Comment On December 22, 2009, at 6:07 PM, jc2811 wrote:

    Check out VHGI Gold www.vhgigold.com

  • Report this Comment On January 07, 2010, at 7:53 AM, henryking54 wrote:

    Of all the minerals mined from the Earth, none is more useful than gold. Its usefulness is derived from a diversity of special properties. Gold conducts electricity, does not tarnish, is very easy to work, can be drawn into wire, can be hammered into thin sheets, alloys with many other metals, can be melted and cast into highly detailed shapes, has a wonderful color and a brilliant luster. Gold is a memorable metal that occupies a special place in the human mind.

    Industrial uses of gold include:

    Jewelry

    Dental

    Financial

    Medical

    Electronics

    Aerospace

    Computers

    Awards

    Glass

    Gilding

    Most of the ways that gold is used today have been developed only during the last two or three decades. This trend will likely continue. As our society requires more sophisticated and reliable materials our uses for gold will increase. This combination of growing demand, few substitutes and limited supply will cause the value and importance of gold to increase steadily over time. It is truly a metal of the future.

    http://geology.com/minerals/gold/uses-of-gold.shtml

  • Report this Comment On January 07, 2010, at 9:15 AM, lemoneater wrote:

    Interesting article and discussion. Salt vs Gold. Hmmn does that make one a Saltbug? I prefer to not be a bug at all:) But if I were any kind of a bug it would be a strange insect indeed with a lot of variety. Don't put all your bugs in one basket.

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