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|Company||Pan American Silver (NYSE: PAAS )|
|Stock Price At Recommendation:||$38.98|
Pan American Silver profile
|CAPS Star Rating (out of 5)||***|
|Industry||Precious metals and minerals|
|Market Cap||$3.7 billion|
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.