The Best Small Cap for 2007: Pan American Silver

As fears of an inverted yield curve, a weakening dollar, and an economic slowdown mount, commodities are getting more attention.

Why, you ask? Well, for one thing, the performance of commodities in general, and precious metals in particular, has historically had a low correlation with the rest of the market, so the sector becomes more appealing in down markets.

But precious metals have also done well in the bull market of the past few years. Consider, for instance, that the Vanguard Precious Metals & Mining Fund has gained 36% per annum over the past five years and the streetTRACKSGold Shares (NYSE: GLD  ) ETF, which roughly tracks the value of gold, is up 23% in the past 52 weeks.

The S&P 500, by comparison, is up roughly 6% per year over the past five years and 14% in the past year.

Silver spoons
Silver-mining stocks, as a group, have done particularly well -- up 49% in the past 52 weeks.

Among this group are:

Company

YTD Performance*

Silver Standard Resources (Nasdaq: SSRI  )

100%

Hecla Mining (NYSE: HL  )

83%

Silver Wheaton (NYSE: SLW  )

99%

Apex Silver Mines (AMEX: SIL  )

7%

Coeur d'AleneMines (NYSE: CDE  )

34%

*Data courtesy of Morningstar, as of Dec. 6, 2006.

As you can see, not all silver-mining stocks perform the same in a strong silver market.

So which one is the best for your portfolio?

One silver company that investors participating in Motley Fool CAPS, our new investing community service, are overwhelmingly bullish on is Pan American Silver (Nasdaq: PAAS  ) . Fully 94% of CAPS investors who have rated the stock believe it will "outperform" the S&P 500 in the future. Follow this link to hear what the CAPS investors are saying about Pan American.

Now, perhaps some of the enthusiasm behind Pan American stems from Jim Cramer's endorsement on Mad Money earlier this year, but the stock has certainly performed nicely over the past year -- up 37% year-to-date.

Pan American performance has shown a strong correlation with the iSharesSilver Trust ETF (SLV) since the ETF was released in April 2006, but expanding operating margins and strong revenue growth may help Pan American push well ahead of the silver-tracking ETF down the road.

And, being a small-cap company, Pan American naturally has more room to run than some of its larger cap counterparts.

Ag, there's a silver lining!
Precious metals stocks are inherently volatile, so tread carefully. Your time horizon and risk tolerance should be considered before jumping into the precious metals market. If you're nearing retirement, for example, and are generally conservative with your investments, you may want to stay away from this group altogether. For instance, the aforementioned Vanguard Precious Metals Fund was down every year between 1994 and 1998, and lost 40% in 1997 alone. Imagine if you had to sell this fund in 1997 to pay for retirement expenses and half of your investment was gone!

So, is Pan American Silver going to be the best small-cap investment of 2007? It's certainly possible if silver prices keep rising, but only time will tell.

What do you think? Make your voice heard on Motley Fool CAPS. Simply rate Pan American "outperform" or "underperform" versus the S&P 500. To get going, click here. Based on your thoughts, we'll declare the best small cap for 2007 early next week.

Seen our other contenders for best small cap? If not, click here.

Todd Wenningthinks an increase in werewolf sightings will drive the price of silver through the roof. He does not own shares of any company mentioned in the article. He is currently ranked 1,199 out of 15,096 CAPS investors. See his picks here. The Fool's disclosure policy recommends you pick up a copy of Bob Seger & The Silver Bullet Band's Greatest Hits.


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