For years, investors have been talking about FAANG stocks, which is a collection of the largest and most influential technology names on Wall Street. But recently a new acronym has cropped up: BAANG. That stands for Barrick Gold (GOLD -0.58%), AngloGold, Agnico Eagle Mines, Franco-Nevada (FNV -0.03%), and Gold Fields. BAANG stocks are pretty much the polar opposite of FAANG stocks. Here's what you need to know about investing in gold, why most of the BAANG stocks aren't going to be a good fit in your portfolio, and why one name on the list (and its peers) is actually worth looking adding to the mix, at least in small quantities.
A little background
Some high-profile investors have been recommending gold lately. That includes Ray Dalio, the founder of Bridgewater Associates, one of the largest hedge funds in the world. He expects gold to be a safe haven as global debt issues and tensions between countries, and between the affluent and less affluent within countries, leads to a period of spiking inflation. It's a big long-term call, but looking at the financial environment today, Dalio's thoughts on gold are hardly outlandish.
That said, it was John Roque, an analyst at Wolfe Research, that coined the term BAANG. His thought is that FAANG stocks have reached a peak and the largely out-of-favor gold names are ready to rally. In fact, by the time his new acronym made headlines in late July, the stocks, as a group, were already up around 40% in just a few months. But that was a rise from multiyear lows, which Roque suggests leaves plenty of room for further price increases. Barrick Gold, for example, is still down around 66% from its early decade highs despite a 33% price advance so far in 2019.
How to play gold
Even if you don't buy into Dalio's long-term view or Roque's shorter-term take, gold can add diversification to your portfolio because it tends to move differently from other asset classes. Investing a few percentage points of your portfolio, probably no more than 10%, can materially increase your diversification. But how do you do it? Roque is clearly suggesting investors look at the BAANG stocks, but not all gold stocks are created equal.
Barrick, AngloGold, Agnico Eagle Mines, and Gold Fields are all precious metals miners. Their top and bottom lines are clearly tied to the ups and downs of gold and silver prices, but there's more to the picture than that. Building and operating gold mines is an expensive and time-consuming process. When gold prices fall, there's often an adjustment period on the cost side of the equation, as gold miners work to lower costs to deal with lower gold prices. During these periods, gold miners' margins get squeezed, and they often bleed a lot of red ink. It can be difficult to stick with a miner through a period like this.
This is why Franco-Nevada is probably the most interesting name among the BAANG stocks for most investors. Franco-Nevada is what is known as a streaming company. That means it provides miners cash up front in exchange for the right to buy gold and other commodities in the future at reduced rates, often set as a percentage of the current spot price. That locks in low prices and generally wide margins in both good gold markets and bad.
Gold miners ink streaming deals because they can provide them with cash when other sources, like issuing bonds or selling stock, aren't particularly desirable. Franco-Nevada likes these deals because it locks in low prices, avoids the complexity of having to run a mine, and benefits from the growth plans of the miners, which often use the cash to build new mines and expand existing ones. But Franco-Nevada isn't the only large streaming company, Royal Gold (RGLD -0.20%) and Wheaton Precious Metals (NYSE: WPM) are two large competitors that are also worth looking at.
Each has pluses and minuses. For example, Franco-Nevada is the most diversified with over 290 streaming deals (51 in currently producing assets) in the mining space. That said, it also has around 80 investments in oil and natural gas assets, which contributed roughly 16% to its top line in the second quarter. That may be more diversification than investors want, since it isn't actually a pure play on precious metals. Royal Gold, meanwhile, generates the most revenue of this trio from gold (at roughly 70% of the mix; silver and copper make up the rest). From this perspective, Royal Gold may be the best option for investors looking to focus in on gold, noting that it also has a widely diversified portfolio of 191 investments (43 producing).
It's also worth noting here that both Royal Gold and Franco-Nevada have increased their dividends annually for over a decade despite often volatile precious metals prices. A steadily increasing dividend can provide investors a positive to focus on when weak gold prices are putting pressure on stock prices.
Wheaton, meanwhile, stands out on three fronts. First, it has made a concerted effort to focus in on a small number of large deals. It has just 28 investments, 19 of which are producing. It also has a more balanced mix of gold and silver, with gold at around 55% of revenue and silver making up most of the rest. This is actually a shift from the past, when silver was the biggest contributor. And it has a variable dividend policy, which sets the dividend payment at 30% of the average cash generated by the company's operations over the previous four quarters. From a big-picture perspective, Wheaton's dividend is likely to increase materially when the rest of your portfolio is struggling. But it will also likely fall when gold prices are weak, an important fact to remember if you buy the stock.
Consider some gold
The BAANG stock idea is something of a market timing call on gold, which isn't really the best reason to own the precious metal. A far better reason is to include some for the long-term diversification benefit the yellow metal offers. And, on that score, one of the best ways to add gold to your portfolio is buying streamers like Franco-Nevada, Royal Gold, and Wheaton. Each is worth a deep dive if either Dalio's long-term gold call or the BAANG idea have caught your attention.