The best thing about the stock market is that you can make money in either direction. Historically, stock indexes have tended to trend up over the long term. But when you look at individual stocks, you'll find plenty that lose money over the long haul. According to hedge fund institution Blackstar Funds, even with dividends included, between 1983 and 2006, 64% of stocks underperformed the Russell 3000, a broad-scope market index.
A large influx of short-sellers shouldn't be a condemning factor to any company, but it could be a red flag from traders that something may not be as cut-and-dried as it appears. Let's look at three companies that have seen a rapid increase in the number of shares sold short and see whether traders are blowing smoke or if their worry has some merit.
| iShares Gold Trust (NYSEMKT: IAU ) | 676.3% | N/A* |
| Hawaiian Electric Industries (NYSE: HE ) | 348% | 8.4% |
| HudBay Minerals (NYSE: HBM ) | 102.2% | 0.8% |
Source: The Wall Street Journal.
*ETFs don't have a fixed share count.
Plenty of luster left in this ETF
The shiny yellow metal may be in the midst of an amazing 11-year ascent, but the past few months have been nothing short of ugly for physical gold, as the broad-based S&P 500 has reached new all-time highs and most investor fear has been placed on the back burner. Often viewed as an inflation and fear hedge, spot gold prices and miners have taken a dive. To add the icing on the cake, Cyprus, which is in the midst of receiving a sizable bailout from the EU, needed to liquidate some of its gold bullion position, which has pressured gold markets.
Despite the bearishness, I think now could be the time to start thinking about buying this iShares Gold Trust ETF. For one, I can hardly find anyone that's optimistic about the spot gold prices moving forward. As a Warren Buffett famous adage goes, this could be the perfect time to "be greedy when others are fearful."
Secondly, I can't help pointing out that economic data thus far has been good, but nowhere near great. Fourth-quarter U.S. GDP growth was just 0.4% and unemployment rates remain historically high, which bodes well that an eventual correction (and a heightened level of investor fear) could be around the corner.
Finally, it's a simple matter of scarcity and demand. Silver may have more practical uses than gold, but demand from rapidly growing China for gold use in electronics, as well as governments around the globe buying gold as a currency hedge (think Russia, China, and Switzerland) should continue to prop up its price. I'd suggest using Cyprus' bullion sale as a possible point of entry into this bullion-owning ETF.
An alternate in the energy sector
Want an easy way to tick off shareholders in the slow-but-steady-growth electric utility sector? Try pricing 7 million new shares on the market and netting $180 million. Although the dilution effect isn't immediate, shareholders in Hawaii Electric Industries, also known as HEI, still weren't pleased that the effective share count would eventually rise and possibly make their shares worth less.
However, it's also worth noting that HEI is a pioneer in alternative-energy innovation, right alongside NextEra Energy (NYSE: NEE ) , and a share offering is probably not enough to derail the long-term opportunity here.
NextEra and HEI are in perfect position to benefit from policies being put in place by the Obama administration over the next decade and beyond, which are focused on promoting natural gas, solar, wind, and other alternative-energy sources as a way to remove America's dependence on foreign oil. NextEra is the largest alternative-energy provider in the U.S., boasting the nation's largest wind-generating capacity and a sizable solar farm. Where HEI differentiates itself, but also places itself among the elite in alternative-energy like NextEra, happens to be in its use of biofuels to run its Campbell Industrial Park generating station. Few utilities have been able to run a facility solely on biofuels, so this is a big (and cost-saving) step.
Let's also not forget that HEI has a veritable monopoly in Hawaii, which creates a near-impossible barrier-to-entry in the costly electric utility sector.
Shareholders may be disgruntled in the near term with the share offering, but this, too, shall pass.
If you build it, they will mine
As we've established, not many investors are happy with mining stocks at the moment -- and that goes double for any companies with big capital expenditure budgets related to mine buildout costs. HudBay Minerals is one such company working on a big expansion, but thankfully it has a silver heavyweight in its corner, providing some much appreciated financial backing.
In August, silver royalty interests company Silver Wheaton (NYSE: SLW ) and HudBay agreed on a long-term contract that will supply Silver Wheaton 100% of HudBay's Constancia and 777 mine silver at a discounted price of $5.90 an ounce, as well as 100% of the gold production at its 777 mine at a discounted price of $400 an ounce until at least 2016. In return, Silver Wheaton injected HudBay with $500 million immediately to complete its Constancia buildout, with two additional $125 million payments to follow if certain measures are met by HudBay. The end result should be a win-win for both companies, with Silver Wheaton securing another long-term royalty stream and HudBay remaining healthfully net cash positive and profitable.
I can somewhat understand investors' apathy surrounding the deal, since Constancia isn't ready to be commissioned until the first quarter of 2015 at the earliest, but the company's updated precious-metal reserves, released three weeks ago, showed that Constancia's measured, indicated, and inferred mineral reserves rose dramatically in 2012. I believe short-sellers are digging in the wrong area looking for treasure by betting against HudBay Minerals.
Foolish roundup
This week's theme is all about alternative thinking. No one likes physical gold or its miners at the moment, which could make for a perfect entry into the iShares Gold Trust or even the well-financed HudBay Minerals. As for HEI, it's a simple case of its alternative-energy program leading long-term costs lower and it maintaining a monopoly in Hawaii's electric-generating business.
What's your take on these three stocks? Do short-sellers have these stocks pegged, or are they blowing smoke? Share your thoughts in the comments section below.
One metal play that continues to shine
If you are looking for a company whose success is determined by the metals market, but without involving itself in the risks of physically mining the metals, then Silver Wheaton provides a unique play on the future of silver. SLW chooses to finance the mining of silver; it has grown sales and net income every year since 2008, and also has increased competitive advantages over its limited peer group. To learn more about Silver Wheaton, click here now to access The Motley Fool's premium research report on the company.
No comments:
Post a Comment