Sandstorm Gold Ready to Reap the Whirlwind

Seeking stocks that others ignore, shun, or simply forget gives individual investors like you an edge over the professionals. Getting in before Wall Street discovers them -- or rediscovers them -- means you can stake a claim before they start taking off. 

Here we check out companies with minimal analyst coverage at best, then pair our list with Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings of one to five stars. A stock that garners a top CAPS rating, but hasn't yet caught analysts' attention, could be your next home run investment.

Gold streamer Sandstorm Gold (SAND 1.12%) looks like it could become that one. Although only one of the Wall Street analysts that CAPS tracks covers it (and gives it a "strong buy" recommendation!) and its current CAPS rating rests on the shifting sands of its stock performance, its operations suggest it will be a long-term top performer. Let's see if that's enough to give you a head start.

Sandstorm Gold snapshot

Source: FinViz.com. N/A = not applicable; Sandstorm Gold doesn't pay a dividend

But remember: Without much analyst support, you'll have to do more digging on your own to see whether it deserves a spot in your portfolio, so don't just buy or sell it based solely on its appearance here. 

Hiding in plain sight
The lower-risk metals streaming business model perfected by Silver Wheaton (WPM 1.12%) is also being put into play at Sandstorm. Instead of taking on the hazards of mining silver or gold itself, Sandstorm, like Silver Wheaton, simply pays up front a fixed price for a percentage of the bullion streams produced by the miners. Not surprisingly, the gold stock is being run by a former Wheaton executive so the company is well-versed in the ins and outs of how that model works (there's a similar streaming model set up in a sister company focusing on metals and natural gas that may be worth watching in the future).

That the model has worked well is evidenced by Sandstorm's stock rising from an adjusted close of $3.15 per share at its IPO in June 2010 to almost $12 today, a gain of around 400%, while gold itself has appreciated just 40% in the same time frame, rising from around $1,240 an ounce to $1,725 today.

Sandstorm has deals in place with Colossus Minerals (NASDAQOTH: COLUF), SilverCrest Mines (NYSEMKT: SVLC), Luna Gold (NASDAQOTH: LGCUF), and Brigus Gold (NYSEMKT: BRD).

Low-cost leader
The Colossus pact was notable for Sandstorm getting 1.5% of all gold produced at the miner's Serra Pelada that's set to commence production next year for just $400 an ounce, while at the same time gaining access to more than a third of its platinum output for the low price of just $200 an ounce. The palladium that's mined will go to the metals and gas streamer.

It's original agreement with Brigus gave Sandstorm the right to 12% of the miner's Black Fox production for which it paid $500 an ounce (according to Sandstorm, it's never paid more than $500 an ounce for the gold it buys making the economics of its business attractive indeed). Brigus just exercised its repurchase rights under that agreement and paid Sandstorm over $24 million to repurchase 4% of the stream, still leaving Sandstorm with rights to 8% of the output.

Big things, small packages
No doubt because of its relatively small size, Sandstorm is a riskier play in the gold streaming business currently occupied by Royal Gold (RGLD 1.88%) and Franco-Nevada (FNV 0.85%), both orders of magnitude larger than Sandstorm. But market caps are less important than the streams they have access to, and while the smaller rival can't match its larger brethren in the size of the deals it can write, it can still pull its weight with quality smaller ones. That was why its financing deal a few months ago was key.

With shares dropping sharply earlier this month, the stock looks more attractive now than it has in a while. So long as central bankers continue their quantitative easing policies and politicians remain unwilling to make difficult spending choices, the price of gold has a tailwind behind it that makes Sandstorm's low-cost streaming model enticing.

Let me know in the comments box below if you agree Sandstorm Gold is about to make a whirlwind breakout.