One Silver Stock to Short

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Company Pan American Silver (NYSE: PAAS  )
Submitted By: JakilaTheHun
Member Rating: 99.95
Submitted On: 2/23/2011
Stock Price At Recommendation: $38.98

Pan American Silver profile

CAPS Star Rating (out of 5) ***
Headquarters Vancouver, Canada
Industry Precious metals and minerals
Market Cap $3.7 billion
P/E 32.7
Competitors

Hecla Mining (NYSE: HL  )

Silver Wheaton (NYSE: SLW  )

Silvercorp Metals (NYSE: SVM  )

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This week's pitch:
Call me crazy, but I'm going to dip my feet in on red-thumbing the metals sector, which is getting increasingly overheated by the day. My big issue is that I like the long-term fundamentals of a lot of metals, but much of the increased prices right now are being driven by speculative investment interest, rather than hard economics.

So why have I decided to pick on PAAS first? Well, first off, there's very little inside ownership. I'm much less likely to red thumb a business where the owners have a major interest in seeing it succeed.

The next issue --- PAAS seems to be valued very aggressively. It's true that PAAS has a good deal of low-cost mines, but even with gold and silver prices at high levels right now, they only churned out 27 cents per share in earnings for the quarter. Let's assume they can double that and then annualize the result --- that gives us earnings of about $2.16 per share. Even going by a P/E multiple of 15, that gives us a price of $32.40, which is about a 10% discount to the market's current valuation.

The other reason I've decided to pick on PAAS -- I'm more leery of red thumbing platinum and palladium, which are in short supply worldwide.

There's also the issue that many people are buying silver and gold, because of a poor understanding of monetary policy. I keep hearing investors flocking to these hard assets because of the coming hyperinflation resulting from the Federal Reserve's policies. Inflation right now is about 1%. It's well below the historical standards and even that is mostly being driven by the boom in China and the emerging markets.

One final reason to red thumb PAAS -- it's involved with both gold and silver. That's good because if the economic environment improves, gold will suffer, whereas prospects for silver could improve as a result of increased industrial demand. Conversely, if the economic environment gets worse, gold might continue to move upwards, but industrial demand for silver will be undermined. Maybe the market is right about gold or right about silver; but I don't think it's right about both.

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The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (13)

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 March 16, 2011, at 7:09 PM, bocacassidy wrote:

    Inflation ? ONE % ??? .....I know of no one who buys that number ...Food , fuel , utilities are are sharply rising ...The "one %" is US government propaganda ...a shoddy attempt to mask the reality ..

    At least , the suggestion is an amusing jest !

  • Report this Comment On March 16, 2011, at 9:56 PM, cashmand wrote:

    your idea specific to paas ,i dont care about.I do want to help the spread of disinformation though...if you think inflation is 1 percent than you need to study the real economy.Please see john williams..shadowstats .com.Nevertheless ill be short..as long as their are negative interest rates and a budget deficit of a gazillion...you may want to change your silver stock but the ag fundamentals are fabulous.tech analysis; lower left corner to upper right with minor corrections for the foreseeable future.

  • Report this Comment On March 17, 2011, at 12:22 PM, silverminer wrote:

    News Flash: silver is in short supply.

  • Report this Comment On March 17, 2011, at 12:52 PM, silverminer wrote:

    Those not feeling bullish on silver are free to avoid it, but shorting either gold or silver (or related equities) in the midst of this historic, decade-long secular bull market could well be considered one of the highest-risk plays imaginable.

    Also, if PAAS succeeds in gaining an exception or permit for the Navidad project, this stock has the potential to revalue briskly to the upside.

    Although I am exclusively a buy-and-hold investor, I could conceive of thousands of short opportunities with a superior risk/reward profile.

  • Report this Comment On March 17, 2011, at 1:34 PM, rfaramir wrote:

    "There's also the issue that many people are buying silver and gold, because of a poor understanding of monetary policy. I keep hearing investors flocking to these hard assets because of the coming hyperinflation resulting from the Federal Reserve's policies. Inflation right now is about 1%."

    1% may be the 'core' inflation, meaning taking away food and energy which best reflect (among consumer products) the effects of increasing the money supply.

    We don't know whether we'll get hyperinflation, because we don't know if the Fed will stop (or be stopped from) printing so much money. If they stop, we'll be okay, but a lot has already been printed, so we will get much higher prices. To counter that (not as an investment per se, but to preserve wealth) one buys commodities and precious metals.

    If you still think 'inflation' means higher prices, you need to read a little more economic theory, preferably Austrian. Overall higher prices are the result of increases of the money supply. With a constant money supply, if some prices went up, others would have to fall. A general rise can only happen when more money is chasing the same goods and services.

    Visit mises.org and fee.org for more education.

  • Report this Comment On March 17, 2011, at 4:54 PM, frankinCA wrote:

    Not an economist as such, but well aware people including myself are buying silver and gold coins to protect their wealth even if it is small. The Indian people are the world's most silver oriented people and I expect they like it because it protects themselves against the rupee which was very volatile.

    OK, CDE is a silver mining company just producing from mines that have been mostly brought on line in the last two years. Say five years ago when silver was selling for $9 an oz, the company thought these prospective mines would make them a viable "hold" company and paid their management in options and saved their cash for capital expenditures.

    Good fortune came their way! The housing bubble and the resulting printing of enormous amounts of dollars to stabilize the economy brought fear to those aware the result of that excess would result in inflation of the dollar with respect to other countries currencies.

    "How can I be assured my dollars will not lose value in the coming years?" Yes, investing as much as one can in commodities (silver is one) that always retain a true value independent of currency fluctuations. Hmmm silver is a commodity and if I'm a little bit lucky that the industrial demand and the coin/savings demand remains, I could maintain my wealth using silver until I need cash, at which time I could convert a certain amount of silver to probably many more dollars than I used to buy the amount of silver, I am cashing out. Sounds like Las Vegas doesn't it, it is, but with the caveat that the odds are in your favor, not the house's. At one time CDE was expecting to make a more than reasonable profit when silver was $13 an oz and gold $750 an oz. Gee silver is 2 and a half times that and gold 2 times that. Profits must be pretty good, check it out.....

    If the Comex stops allowing certain banks to sell large quantities of silver contracts short and manipulate the market, it would be at an even higher price than it is today..

    There is a rumor that CDE is borrowing money to partnership with a company that is prospecting for gold in Guyana S. America that is likely an extension of the S. African gold veins that have been the most productive in the world's history. If that is true and gold stays over $1000 an oz then you will be one lucky duck if you have CDE in your portfolio. This is a true growth and solid AA rated company that is arising from the old one that didn't expand its prospects when the silver was making them well-to do. Luckily they have that experience and won,t let it happen again. Management is excellent and been in the business for generations. Not a facebook company but a real honest to goodness product producer you can hold in your hand and spend in a store when necessary!!! On a recent interview with CNBC, the CEO said that he expects silver to bottom at $40 an oz after the surge to $60 or higher is exhausted.

    Help I need you to buy my June $32 call options soon so I can buy a larger quantity of $35 Sept calls.

  • Report this Comment On March 17, 2011, at 9:05 PM, IOWETOMUCH wrote:

    I want you to consider one thing. The CPI report is controlled by who?? look at the link that I have attached for CPI, based on real world cost of goods. It has been created by some very smart individuals and is the most believable CPI est. I have seen. I want you to also look at the dollar value, it is going down.. No Doom, just reality. This makes gold $2400 CPI adjusted to its 1980 level of $850 and I dont think Silver is much behind.. Inflation is here, no matter what report you get shoved down your throat.

    http://www.apartofny.com/a-daily-anticipatory-cpi/

  • Report this Comment On March 21, 2011, at 4:48 PM, Dr9 wrote:

    I noticed that nobody put their name on this article. Savvy career move.

  • Report this Comment On March 22, 2011, at 2:14 PM, rfaramir wrote:

    Dr9,

    I don't know who at TMF promoted this pitch to a standalone article, but the whole thing is just JakilaTheHun's pitch. See his red-thumb of PAAS at his page:

    http://caps.fool.com/player/jakilathehun.aspx

    Note that it is a CLOSED pick. He actually made +6.70 CAPS points from it (stock lost 7.48 vs SPX loss of 0.78). Touting this pick 6 days after Jakila closed it is a bit suspect.

    Kudos to JakilaTheHun for a brave and successful pick. This is a crazy time to be shorting silver miners in general, though.

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