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-- Posted Tuesday, 4 March 2003 | Digg This Article
We’ve received some excellent feedback concerning yesterday’s comments on Royal Gold, which came in for quite a thrashing in the current issue of Barron’s. Because we remain bullish on the stock long-term, we are inclined to thank the author of the article, Rhonda Brammer, for helping to knock the price of Royal’s shares back down to relative bargain levels. The stock fetched nearly $29 a share as recently as early February, but it could have been had for as little as $12.85 on Monday when fearful shareholders, evidently reacting to the Barron’s article, bailed out in droves. And for what? ask two Black Box subscribers who evidently are closely in tune with gold markets. Both suggest that Royal is a poor choice for our upcoming “Dirty Dozen” list simply because it is a darned good company. I’m convinced now that they are right. Here is what Dave K. had to say: “Not sure why you would be putting RGLD on your "dirty dozen" gold stock list. A discounted cash flow analysis for mining stocks is the most retarded metric for valuing gold stocks that I can think of. Have you done any real fundamental analysis of RGLD? Clearly the jack-ass that Rhonda Brammer quoted was a hedge fund manager taking advantage of weak technicals in mining shares, especially RGLD. “RGLD is a somewhat unique gold company. Most of their revenues are derived from sliding-scale royalties from properties that they discovered then sold to developmental companies. As the price of gold increases, RGLD stands to reap increasingly greater royalties from each of the producing properties in which is has interests. They list their royalty agreements on their web-site, so it is very easy to derive potential valuations from existing agreements. ‘Cadillac’ of Miners “In a sense, RGLD can be considered one the ‘Cadillacs’ among the miners. And, quite frankly, their disclosure is exemplary by any company's standards. Ms. Brammer did all of us a favor by publishing that fraudulent piece this weekend....I've been waiting for RGLD to pullback like this and will be buying with both hands.” A second letter, from Dr. B, makes some additional points: “RGLD is ‘doubly leveraged’ to the price of gold. Normal (profitable, unhedged) gold miners are only leveraged to the POG at a single level - meaning that a small percentage increase of the POG leads to a disproportionately high percentage increase of their earnings. However, RLGD is a royalty company. The terms of its contracts specify that the percentage of royalty they get from the mining companies that mine RGLD's property increases as the POG increases. Therefore, in an environment of rising POG, RGLD would do much better than an average stock of an unhedged and profitable gold mining company. (Conversely, in an environment of a falling POG, it will do much worse.) No Dirty Dozen Candidate “Therefore, I don't think that including RGLD on your Dirty Dozen list is a good idea. That is, if I understand the idea behind that list correctly - namely, to show that even the worst gold mining stocks would outperform the SPX in an environment of rising POG. RGLD is definitely not among the ‘worst gold miners’ in such an environment. “Of course, it is always possible that I have misunderstood the purpose of the Dirty Dozen list. Perhaps you want to put on it ‘the most hated’ gold stocks - as opposed to the worst ones? (The two sets are not necessarily identical.) “Regarding the Barron's article - I haven't read it, but the stated P/E of 65 for RGLD simply doesn't sound right; the real P/E was more like 31. While that might still be rather high, it is nothing compared to the P/E of other gold miners (like AEM - in the triple digits) or most stocks on the NDX that have no earnings at all. But I don't care about the P/Es anyway. I'll go by the chart any time. And the chart has been saying ‘stay out of RLGD’ for more than two weeks already.” [The + symbol means we have an open position, while $ means there is actionable advice.] Gold
APR GOLD (354.50): Yesterday’s close was a hair above a hidden resistance-pivot at 354.30. If the futures can close above 355.70 today, we’d infer they’re on their way up to at least 354.30 in this short-term bullish cycle.
+ GG (11.28): We hold 200 shares for an average 4.65. Pull the 10.46 bid for 200 shares, since stochastic signs are moderately buoyant. Even if so, immediate upside potential would appear to be limited by a minor hidden pivot at 11.64.  
DURBAN DEEP (NasdaqSC:DROOY) : Quote - News - Profile - Message Board - Website
+ DROOY (3.60): We own 600 shares for an average 4.38. DROOY will need to close above a hidden pivot at 4.02 to get some breathing room. Once that has occurred, the stock would be an even-odds bet to reach a minimum 4.79 over the near term.
RGLD (13.96): Assuming the stock does not first dip below 13.75, it appeared bound for a hidden pivot at 14.26 when the closing bell rang yesterday. Anything above that number would portend further upside, to a minimum 14.78.  
DJIA (7704.87): As implied here yesterday, we now look for the decline to continue to at least 7661.87. We doubt this support will endure, so it’s time to dust off a still-unachieved target first broached last spring: 6985.24. E-MINI S&Ps (821.00): We now expect the futures to fall to at least 794.25, the most immediate hidden-pivot support of any significance. This goes somewhat against our instincts, since it takes a certain amount of negative energy to crush the market in such a fashion -- more energy, it would seem, than the S&Ps have demonstrated lately. Also, it implies that round-number support at 800 will fail, as well as the support of the February 13 low, 805.25. Even so, the 794.25 pivot may be too compelling to resist, especially with little in the way of good news to life the market. $ MAR BONDS (116.01): Our minimum upside target remains 116.13. If you’ve held long positions on your own initiative, profit-taking was prudent at 115.07, but at least two thirds of any remaining position should be exited between here and the new target. At your discretion, up to 10% of any profits made on the way up can be risked on a single-contract short from 116.13. OEX (415.36): Support vaguely around 410 looks like a logical place for the OEX to head today, but there is little to offer in the way of pivots that can be bought in precise anticipation of a trend change. QQQ (24.50): Upside targets are unchanged -- 25.80, or if any higher, 26.13. If the cubes continue to head lower, however, our minimum projection is 22.96 by no later than tomorrow.
MAR NASDAQ 100 (985.50): The futures would need to close above 1010.00 by tomorrow to kick-start a minor bullish cycle. Alternatively, a close below a hidden pivot at 972.50 would imply that the futures are on their way down to at least 921.00.
-- Posted Tuesday, 4 March 2003 | Digg This Article
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MarketWise Black Box is published on weekdays 240 times per year. Copyright 2003 by MarketWise. For further information please go to www.marketwise.com. All information was gathered from sources believed to be reliable The risk of loss in futures, stocks or options can be substantial; therefore only genuine risk s should be used for such trading. Futures, stocks and options may not be a suitable investment for all individuals, and individuals should therefore carefully consider their financial condition in deciding whether to trade. Commodity option traders should be aware that the assignment of a short position will result in a futures position. Past profits are not indicative of future profits.
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