I'm writing about AUY because of an article at The Street on defensive plays to counter the presumed absence of a new round of quantitative easing from the Federal Reserve. You can read the article by Jonas Elmerraji here.
The Street is in my mind the web's pre-eminent story-stock site, and that's Elmerraji's approach. He recounts a narrative about why QE3 is unlikely to happen, and then ties it into four stocks, two of which are in gold mining companies. In making my selection, I rejected one stock because of lower liquidity, and picked AUY as having the most bullish chart of the remaining three.
Gold mining is a funny sort for play. The value of these companies depends heavily on gold prices. But it also depends upon the productivity of their holdings and the odds of a new finds. So while gold is a general commodity, gold mining shares are very specific to each company and its management.
Gold (as front-month futures) reached an all-time high of $1,923.70 last September, began to zig-zag down thereafter, and reached a swing high in the downtrend of $1792.70 on Feb. 28.
AUY hit an all-time high of $19.93 in March 2008, fell sharply, and began to zig-zag up, reaching a swing high of $18.16 on Feb. 29. So there are are big differences in how the prices move for the metal and miners. The degree of movement differs, and often, so does the timing.
From the February high, AUY dropped to $12.68 on May 16 and from there has risen to today's swing high of $16.62, a level that prompted a quick pullback.
Big picture, the stock has been in an uptrend since its 2008 recession low and is in the midst of another leg up that will confirm continuation of the uptrend if it breaks above the $18.16 swing high.
That analysis gives about 11% to the upside before the price reaches resistance.
The analyst consensus is neutral with regards to AUY. They expect it to perform about as well as the market as a whole.
AUY has return on equity of 8%, which is in the tortoise range. Long-term debt is quite low, at only 10% of equity.
Earnings have been mainly on the rise since early 2010 and have been at a plateau the last four quarters, with small upside earnings surprises each quarter.
Institutions own 61% of shares. The stock is very expensive. It takes $5.31 in shares to control a dollar sales.
On average, AUY trades 7.4 million shares a day, sufficient to support a good options inventory with high open interest and narrow bid/ask spreads.
Implied volatility stands at 47%, about the middle of the six-month range. It has been in a zig-zagging downtrend since May 18.
Options prices assumes that 68.2% of stock trades over the next month will be between $14.17 and $18.57.
Yamana Gold next publishes earnings on Aug. 6. the stock goes ex-dividend on June 27 for a quarterly payout yielding 1.35% annualized.
Decision for my account: The conventional wisdom these days is that everyone ought to hide some gold or gold-mining shares in their brokerage account's equivalent of a root cellar. Every other piece of junk mail that I get nowadays plays into that narrative, as does commentary from a number of sources that I respect.
I don't buy into that argument. Gold is now selling at about seven times its price after the 9/11 attacks in New York and Washington. There's no way that I believe that the world is seven times scarier now than it was then.
Gold has only a spotty correlation to real-world events. It doesn't even correlate well to inflation, since its price has risen like gang-busters as inflation has remained low.
In the case of gold-mining shares, the divergence is potentially even greater, since so much depends upon things specific to each company.
(See my 2011 essay "Gold: A letter to a friend" for further thoughts on the metal.)
I like AUY's chart as a short-term directional play. The neutral analyst consensus, however, suggests that there are better vehicles for implementing that strategy.
Buying the stock and selling covered calls against it would allow capture of the small dividend income to supplement the higher income from call sales. That strategy would lower the basis for owning the stock, but would also limit capital gains.
For my own account, I have better choices than AUY for implementing a bullish strategy, and I won't be adding it to my holdings.
My preferred play for troubled times is an aggressive strategy of hedging options on stocks and their indexes, with my positions insured against catastrophic loss by buying way out-of-the-money puts. It's a much more flexible and profitable, and ultimately cheaper, strategy.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.