At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the best...
As gold prices soared past $1,900 an ounce on Monday, shareholders of Newmont Mining (NYSE: NEM ) got a double dose of good news: Not only is its company's stock in trade worth more, but the stock itself is a buy.
At least it is according to Citigroup. The megabanker upped its rating on Newmont and upped its price target on the stock to boot. Within a year, Citi says, Newmont shares should fetch $80 apiece and lift this currently $30 billion company to nearly $40 billion in market cap. Investors, with dreams of riches in their hearts, reacted positively to the upgrade (and the gold price) on Monday, bidding Newmont shares up nearly 5%. But should they have?
Why so shy, Citi?
I mean, Citi's posting a pretty aggressive target here. At $40 billion in market cap, Newmont would outshine rivals AngloGold Ashanti (NYSE: AU ) , Kinross Gold (NYSE: KGC ) , and Gold Fields (NYSE: GFI ) by more than half. It would come within a whisker of the worth of Goldcorp (NYSE: GG ) , and lag industry giant Barrick Gold (NYSE: ABX ) by only $12 billion or so. Yet in staking its bold gold claim, Citi offers precious little to support its argument.
Sure, once upon a time, Citi was one of the better analysts we were tracking on CAPS -- but the analyst hasn't submitted ratings for public examination (and accountability) for over a year now. What's more, the last batch of mining stocks Citi did rate were recently spotted underperforming the S&P 500 by more than a 2-1 margin. To top it all off, Citi has also "gone dark" on explanations for its ratings. Not a single major media outlet, that I've seen, has been given any details on what's behind Citi's bullish stance on Newmont. As a result, investors who bought Newmont on Monday were essentially doing so on Citi's say-so, sans any explanation for why they should buy.
Let's do something about that.
Newmont Mining: Buy these numbers?
If Citi had never made a peep about the stock, would you have bought Newmont Mining on its own merits? With gold making a run at $2,000 an ounce, it sounds like a no-brainer. After all, the 93,500,000 ounces of "proved and probable, recoverable and attributable" gold reserves on Newmont's balance sheet suggest an asset value of $177 billion for this company ($177 billion minimum -- because Newmont also has additional sizable reserves of silver and copper). Whether Newmont's selling for today's $30 billion market cap or the $40 billion Citi projects a year from now, either way sounds like a bargain.
The question, though, isn't necessarily, "How much gold does Newmont have?" but rather, "How much profit can Newmont earn by getting that gold out of the ground and to market?" And here's where the problem appears.
Right now, Newmont shares cost nearly 14 times the amount of profit it's been able to earn over the past 12 months of a raging bull market for gold. On the one hand, this P/E is cheaper than any other gold stock named above (except Barrick). On the other hand, though, most analysts on Wall Street predict that Newmont is going to be about the slowest grower in the entire gold industry over the next five years. The 3.2% long-term earnings growth rate most often cited for Newmont lags those of smaller rivals Kinross (9%), Gold Fields (23%), and AngloGold (67%). And don't blame Newmont's size for slowing it down, either -- larger Barrick and GoldCorp are also expected to outgrow Newmont several times over.
Foolish takeaway
Unless Citi sees greater growth potential in Newmont than do the other dozen-odd analysts who follow the stock, I honestly don't see the attraction here. From a pure PEG analysis perspective, if you're in the market for a large-cap gold stock, you're probably better off digging into GoldCorp or Barrick before panning for profit at Newmont.
On the other hand, if you're interested in a small-cap gold stock with even bigger potential than GoldCorp, Barrick, or Newmont -- don't miss this Fool report. Gold may cost $1,900 an ounce, but our report is entirely free.
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