The price of gold has climbed around 25% so far in 2016, so it's no surprise that many gold stocks having a great run of late. But miner Barrick Gold ( GOLD 0.22% ), in particular, has skyrocketed an amazing 190% year to date, crushing the returns of both the broader market and many of its peers, helped by a combination of rising gold prices and its successful debt and expense reduction efforts.
But that doesn't mean Barrick Gold is the best place to put your hard-earned cash to work today. We asked three Motley Fool contributors to each pick a stock they believe has even greater potential. Read on to see which businesses they chose and why.
Even more lustrous than Barrick Gold
Sean Williams: Barrick Gold has been a hot mining stock lately, and it's pretty tough to argue against a company that has the best all-in sustaining costs (AISC) of the biggest gold miners. However, I believe you could find an even better value within the gold mining sector by looking more closely at small-cap Primero Mining ( PPP ).
Where you're not going to find a difference between Barrick Gold and Primero Mining is the short- and intermediate-term outlook for the underlying commodity they produce: gold. The lustrous yellow metal continues to benefit from historically low yields around the globe, uncertainty created from Brexit and the upcoming U.S. presidential election, and growing demand for physical gold from investors and central banks.
What makes Primero so attractive is its valuation relative to its future cash flow potential after two recent bad-news events. Primero's first-quarter results were a disaster, with the company shutting down various parts of its prized San Dimas mine to improve safety aspects of the mine. The company has also been dealing with tax regulators in Mexico that want to throw out its Advanced Pricing Agreement that dictates what percentage of income is taxable at its Mexican subsidiary. This uncertainty has left Primero mired in a miasma of middling returns. In fact, it's the worst-performing gold miner with a valuation of at least $300 million in 2016.
But these are both short-term issues. Production at San Dimas returned to normal in April, and Primero has even urged the Canadian government to possibly intervene with the Mexican tax authorities. This tax issue has more than likely been factored into Primero's share price.
Looking ahead, Primero is expected to boost production to 205,000 gold equivalent ounces (GEO) in 2017, which would be a modest climb from the 190,000 GEO it produced in 2015. More importantly, AISC at San Dimas could fall well below $800 an ounce, and AISC at Black Fox should dip below $1,000 an ounce. This means juicier margins for Primero.
Valued at less than 4 times its 2017 cash flow per share estimates, Primero is a riskier -- but fundamentally more attractive -- buy than Barrick Gold.
Another "real" way to beat the market
Steve Symington: While many investors revel in the idea of investing in gold or gold miners, I'll suggest a novel way to take advantage of another popular asset category: Real estate.
More specifically, I think investors would be wise to own shares of a relatively small real estate investment trust (REIT) called Retail Opportunity Investments Corp. ( ROIC 1.13% ). In particular, Retail Opportunity Investments focuses on buying and revitalizing necessity-based retail properties, primarily including grocery-anchored shopping centers in densely populated mid- to upper-income areas of the western United States. The company is led by industry veteran Stuart Tanz, who notably guided Pan Pacific Retail all the way from its $146 million IPO in 1997 to its $4.1 billion acquisition in 2006 by Kimco Realty ( KIM 0.17% ).
As of its most recent quarter, Retail Opportunity Investments' portfolio consisted of 75 grocery-anchored shopping centers encompassing roughly 8.8 million square feet, up from 64 centers spanning 7.6 million square feet at the same time a year earlier. Meanwhile, Retail Opportunity Investments boasted an impressive 97.2% leased rate, marking its ninth straight quarter keeping the metric above 97%, all while increasing same-space comparative base rent 12.7% as demand for prime retail space continues to grow in these key supply constrained markets. On the bottom line, ROIC's funds from operations per share -- which essentially measures its cash flow from operations -- grew 17.4% year over year. And to top it off, as a REIT, Retail Opportunity Investments must return at least 90% of its income to shareholders in the form of dividends, which at today's prices brings its annual yield to a healthy 3.2%.
That's not to say shares look overwhelmingly cheap today. Retail Opportunity Investments stock currently sits near all-time highs on the heels of last quarter's strong results. And based on the midpoint of this year's expected funds from operations, its FFO yield sits a modest 4.53% as of this writing. With that in mind, the company opportunistically raised cash earlier this week by offering nearly 6.6 million new shares of common stock, and will primarily use the proceeds of that offering to reduce borrowings under its $500 million unsecured revolving credit facility, which were incurred partly to fund its aggressive property acquisitions. But when the dust settles, I think raising funds at these levels should prove to be yet another astute move by management as it works to continuously grow the business.
In the end, though some might prefer to opt for a more attractive entry point, I think Retail Opportunity Investments stock should continue to crush the market for patient, long-term investors willing to buy and hold shares as that end goal comes to fruition.
An e-commerce dynamo
Tim Green: There are plenty of fast-growing companies that could produce incredible returns for investors. Online furniture retailer Wayfair ( W 3.41% ) is a great example. The company is growing at a blistering pace, with revenue jumping by 76.1% during the first quarter to $747 million. The total number of active customers in the company's direct retail business surged 68.9%, and the average order value was $238.
Wayfair generated about $2.57 billion of revenue over the past year, putting its market capitalization at just about 1.3 times sales. If Wayfair can keep its impressive growth rate up, it's not difficult to imagine the stock being worth far more five or 10 years down the line. The company carries millions of items, and its asset-light business model, where most orders are shipped directly from manufacturers, means that the Wayfair doesn't need to make big investments in inventory in order to grow.
While Wayfair has all the makings of a stock that could soar in the coming years, investors should be aware that there are major risks. The company is unprofitable, posting a $77 million net loss during 2015. Advertising costs are extremely high, soaking up 13% of revenue and 55% of gross profit during the first quarter. The big risk is that these advertising expenses never come down. Given how competitive the furniture retail industry is, that concern isn't far-fetched.
If Wayfair continues to grow rapidly and eventually reaches profitability, the stock could deliver massive returns for investors. But that outcome is far from guaranteed.