Top picks 2012: Agnico-Eagle Mines
With production set to rebound and Fed-fueled inflation on the horizon, the gold miner's stock is just too cheap to pass up.
You probably think I'm crazy, but my top recommendation for the coming year is the stock of a company I don't like and expect to fall 12% to 20%, perhaps more.
The company is Agnico-Eagle Mines (AEM). The reason for my apparent insanity is that the stock is just too cheap.
Remember: The key to success in investing is your buy price. You can make money in a so-so company if you get it cheap enough and you can lose money in a great company if you overpay.
Agnico-Eagle is better than so-so. In fact, it is usually a solid operator with good assets and a promising pipeline strengthened by disciplined acquisitions.
I just think management is too generous with its options compensation and too quick to gloss over problems.
The company is having production troubles at two of its big mines, causing the stock to tumble 57% in the last 12 months.
That drop will eliminate options expenses for a few years unless the company reprices them. Though possible, that would be very bad public relations. You don’t want to annoy your shareholders after they’ve just taken a big hit.
Okay, you’ve heard what I don’t like about AE. Now let's talk about what I do like. Agnico-Eagle’s mines are in countries that are politically stable. That may be very important in coming years, as South and Central American countries swing back to the political left.
Despite its recent production problems, the company should earn $3 a share for 2012, assuming gold stays above $1,250, which is a pretty safe bet. Its price-to-earnings ratio of 12 is the cheapest of the big gold miners.
But even if AEM misses estimates, several new mines will come on line in the next three years, lifting production substantially.
Meanwhile, after a recession in 2012, gold prices should soar as the Fed prints money to pay off the parade of unfunded liabilities coming due. In short, production problems or not, repriced options or not, the shares are a bargain.
I’m starting to accumulate shares now because:
• I could be wrong about the recession and a concomitant short-term drop in gold prices
• After heavy year-end tax selling, the shares could bounce back in January
• At this price, recommendations from big brokers or investment media could boost shares.
They’re cheap enough to start buying now. If they fall another 10% to 20%, all the better. Buy more. Two years from now it will all be money well spent.
Buy Agnico-Eagle Mines up to $40. Take an initial position now and add on pullbacks of 10% and 20%. At those prices it would be okay to overweight the stock.
MORE ON MSN MONEY
Copyright © 2013 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Financial Information.
All hail the bull market, which ended the week with a big rally. But it also is starting to look a little like 1987, which suffered an epic blow-out.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.