Silver Wheaton: Tomorrow's Monster Stock

Stocks climbing to 10 times their original price are rare breeds -- but they're not impossible to find. Especially when you have Fools for friends.

The market's best stocks include companies that have risen dozens of times in value by taking advantage of the market's weaknesses. These aren't penny stocks; they're viable companies with sound business prospects that are achieving phenomenal returns. Finding just one or two of these monstrously successful firms can help you establish a winning portfolio.

Stalking the monster
To find tomorrow's winners, we've enlisted the help of more than 180,000 monster trackers at Motley Fool CAPS who have successfully picked stocks that have doubled, tripled, or even quadrupled in price. This week All-Star member rzld36 gives us silver streaming specialist Silver Wheaton (SLW +4.59%) as his next monster pick. He made his mark with Tenet Healthcare (THC 1.84%), which surged 350% after he picked it to outperform the S&P 500, which rose only 19% in the same time frame.

Of course, you shouldn't jump into the breach just because an All-Star stock picker did. Just consider this as a starting point for your own research of extreme buying opportunities.

Silver Wheaton snapshot

Source: FinViz.com. TTM = trailing 12 months.

Stream of consciousness
The beauty of the silver streaming model, as anyone who invests in the space knows, is that companies unlike silver miners such as Coeur D'Alene Mines (CDE +5.94%), First Majestic Silver (AG +7.04%), or Silver Standard Resources (NASDAQ: SSRI), Silver Wheaton enjoys the rewards of the precious metal's price without much of the risk associated with digging in the dirt for it. It's a pure play in the business, but of course, if it were that easy, everyone would do it.

Streamers front the financing costs for the miners for drilling and such, and in return are guaranteed the right to purchase a portion of the miner's production at a fixed cost. So as much as investors need to look at the price of silver and where it's likely heading in determining whether a silver streamer is a good investment, it's also wise to see who its partners are and what they're producing.

A friend of a friend
In that vein (yes, pun intended), Silver Wheaton is most unequaled. For example, it counts top-tier gold miner Goldcorp (GG +0.00%) among its partners with its world class Penasquito mine finally completing the ramp up to bringing production to an anticipated 5.3 million ounces of silver. Barrick Gold's (ABX +2.85%) Pascua-Lama mine also promises to yield an average 9 million ounces annually over the first five years.

Did I mention there were risks? The Penasquito mine is suffering from severe drought conditions, so without sufficient water supplies the mine will endure limited throughput that reduces the silver production attributable to Silver Wheaton till at least the end of the year. And Pascua-Lama is breaking down under lower than expected productivity with initial production now pushed back to mid-2014 while capital costs will increase 50% to 60% .

At least Primero Mining (PPP +0.00%) won a victory in the Mexican tax courts, which benefits the way the tax authorities treat the portion of its silver production that's delivered to the streamer. Silver Wheaton also just added a rich lode from base-metal miner Hudbay Minerals (HBM +3.51%), which has operations in Canada and Peru.

Fool's gold?
But the challenges are less than the opportunities, hurdles to be surmounted on the path toward greater riches. Silver Wheaton now has more than $1.1 billion in cash in the bank and negligible long-term debt of under $36 million.

The real key to its future remains the reserves and resources underlying the company's streaming agreements. Between proven and probable reserves and those measured and indicated, Silver Wheaton has some 1.3 billion ounces of silver to its name, which at current rates of around $31 per ounce suggests a market value closing in on $42 billion. Moreover, the silver streaming specialist has cash costs of just $4.06 per equivalent silver ounce, down from $4.14 a year ago.

Earlier this spring, I rated Silver Wheaton to outperform the broad market indexes on CAPS, the investor community that translates informed opinion into stock ratings of one to five stars. Since then, its stock has jumped by 27% compared to a 2.6% increase in the S&P 500. I see no reason to change that assessment, but let me know in the comments box below if by stepping into the stream at this point you'll be carried off to lower valuations.