After watching their benchmark get wrecked in 2011, many resource investors now wonder if it’s time to buy in anticipation of an uptrend…
The short answer is, “Not yet… But we’re getting close.”
I size up the broad market for small energy and mining stocks by monitoring the TSX Venture Index. It’s sort of the “Dow Industrials for junior resource stocks.” And it’s closing out a brutal year. It’s lost over 37% of its value since its high in March 2011.
Back in May, I noted how the big uptrend in the junior resource sector had stalled… which called for caution.
After all, resource stocks tend to boom and bust like crazy. A big part of your success here is to avoid the busts. As you can see from the Venture Index chart below, the weakness I highlighted in May turned lasted all year. Risk-wary investors fled the sector.
[ad#Google Adsense 336×280-IA]I don’t think that trend is going to turn around in the next few months, either.
You see, most of these tiny companies work in the northern hemisphere. Since we’re heading into winter, companies looking for gold up in the mountains are shutting down. They’ll be getting in the last of the assays for late drill holes. So the likelihood of a big discovery is pretty slim.
For the next couple months, they’ll be in “winter mode.” They’ll digest the information gained during the past year’s field season, interpret it, and plan for the next year. They won’t be sending out triumphant news releases.
That leads to a dropoff in investor interest. And we won’t see it pick up again until late February, when companies gear up for the giant Prospectors and Developers Conference in Toronto in March. That’s North America’s largest mining conference. Companies bring their technical folks to meet industry analysts, fund managers, and serious investors. And that often means a jump in valuations.
We’re not there yet. But in the meantime, we have a chance to look for value in the sector…
After falling for nine months straight, many companies are trading at or under the value of their cash and assets. When you can simply buy the company with its own cash, it certainly lowers the risk of a big loss. There are currently 17 companies on the Venture Exchange trading for less than cash in the bank.
Here are the five largest:
This isn’t a list of companies to go buy today. I’m sure there are a few warts hidden in here. But anytime you can buy a dollar for $0.55 (like Gobimin), it’s worth taking a long look. And when you see several companies trading so cheap, you can figure the whole sector might be nearing a bottom.
In sum, I’m not buying yet. But I am doing research on a handful of newly cheap stocks… so I’ll be ready to buy as soon as the junior resource trend turns back up.
Matt Badiali[ad#jack p.s.]
Source: The Growth Stock Wire