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financial articles by Joshua enomoto

commodities | Natural resources | energy | precious metals

** The following should NOT be construed as financial or investment advice. Investment is inherently risky and can lead to catastrophic loss. Always perform due diligence before investing.** 

2014 articles

db commodities tracking index

+1.07%   between March 6, 2014 and time of writing (Feb 28, 2014)
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Over the past few months, we have highlighted several companies within the mining and resource sector that appear poised to break higher ground in the equities market. In the search for the granular, we may have overlooked an obvious point. Instead of focusing on specific names, which can admittedly be hit-or-miss regardless of other fundamentals, why not just invest in the resource industry itself? Exchange Traded Funds, or ETF's, that track the movements of the general commodities sphere takes out much of the unpredictability inherent in company specific investing.

For the purposes of this article, we will be focusing on the PowerShares DB Commodity Index Tracking (NYSE : DBC). Its fund summary in part states that, "The Fund pursues its investment objective by investing in a portfolio of exchange-traded futures on the commodities comprising the Index, or the Index Commodities. The Index Commodities are Light Sweet Crude Oil (WTI), Heating Oil, RBOB Gasoline, Natural Gas, Brent Crude, Gold, Silver, Aluminum, Zinc, Copper Grade A, Corn, Wheat, Soybeans, and Sugar."

One of the golden rules of ETF investing is to always check its average volume. Liquidity is all important as assets that cannot be cashed out within a reasonable time frame (and reasonable in this day and age means "immediate") really cannot be considered as "assets." Going hand-in-hand with this rule is the inception rule, or, when did the ETF originate? The last thing that any investor wants to see is a newly birthed fund that continues to shed volume, and thus, liquidity. Don't be a victim of the so-called "Zombie ETF," or funds that have such little activity that they're only considered alive as a technicality.

Since DBC is traded on the premiere New York Stock Exchange with a 3-month average volume of 2.2 million shares and an inception date of February 2006, investors can have confidence that this is not a flash-in-the-pan fund. Usually, Zombie ETF's are traded in the lower tier exchanges and feature two- or three- times leverage, or other exotic mechanisms. Also, they can have erratic daily price behaviors, which makes traditional analytical methods inaccurate or unreliable.

For those considering DBC, the massive commodities sell-off that was initiated in the spring of 2013 provides an opportunity to get hard asset exposure at a discount :


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One of the trends that piqued our interest was the bears' failure to land the death-blow on the sector in the final stretches of 2013. With the recent comeback in the metals complex, particularly copper and the precious metals, this drove DBC slightly above a technical demarcation line, the last corner separating a bull market from a bear. So far, the enthusiasm has been strong and recent global developments could send gold and gold stocks much higher, thus potentially providing more fuel to the fire.

The case for DBC gets stronger when we look at long-term averages :

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Despite the media hammering gold and other commodities, when you look at annual price averages, the market is steadily moving higher, not lower. The mainstream hysteria is from the wild gyrations that result from parabolic manias, but these gyrations are not unique to gold and the commodities. When these short-term spikes (and subsequent bottoms) are averaged out, there's still a lot of growth being exhibited in these markets and the best days may still be ahead of us.

So long story short, don't overlook what commodities can potentially do for your portfolio!


Canadian national railway company

+1.20%   between March 6, 2014 and time of writing (Feb 21, 2014)
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With a domestic and global economic recovery questionable at best, many investors have been caught in a no man's land, unsure of where to place their capital. The rise in gold is a symptom of this financial ambiguity and several circumstances suggest that its ascending journey is only in its infancy. That said, there are opportunities in more traditional avenues. One of them that is typically ignored in our current high-flying information technology age is the railroad industry. Its lumbering image from a by-gone era likely does not appeal to the investment community at large but it remains an essential component of the commodities sector.

The increasing output (and political/corporate attention) of the North American oil and gas boom, which includes the shale gas revolution, has spurred demand for the means of transporting "black gold." Many top railroad companies have reported better than expected earnings performance and their share prices have naturally risen. One name that may benefit from the improved fundamentals is Canadian National Railway Company (NYSE : CNI). According to their profile, Canadian National Railway Company, together with its subsidiaries, engages in rail and related transportation business in North America. It transports various goods, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal, and automotive products.

Fundamentally, one of the more impressive factors regarding CNI is its revenue stream, which has grown an average of 14% from fiscal year 2010 to 2013. Its most recent annual earnings performance dipped slightly from last year, thus its shares did not experience the same kind of boost that its competitors benefitted from ; however, earnings are up 4.2% compared to the average performance against the last three reporting periods. It should be noted that the discrepancy between revenue and earnings lie mostly with income tax rates, which on average has gone up nearly 8%.

The balance sheet side is where things get problematic : while cash-on-hand from the first quarter of 2013 has gone up significantly against the backdrop of declining short-term debt, its ratio against long-term debt stands at nearly 10%. Are there companies that have higher debt loads? Absolutely, and debt (or lack of it) is not the end-all barometer of future performance. Still, for the potential investor, this overhanging liability must be addressed in the interest of full disclosure. High debt levels will also be an even bigger concern should interest rates rise in North America (this may be more fact than fiction). On a positive note, net cash-flow has hit green in three of the last four annual reporting periods (including the financing charge of their debt obligations) so the overall financial picture is one of stability and a reasonable chance for growth.

This plays in a very stable technical picture :  


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CNI is trading in a very defined, ascending trend channel that has only once threatened to break the pattern (in September of 2013). Otherwise, price dips have proven thus far to be buying opportunities and investors should note that at no time since December of 2011 has the 50 day moving average crossed underneath the 200. With the Relative Strength Indicator registering just shy of 60, we may see a slight break in bullish enthusiasm before re-engaging the original trend. One point of caution is that the volatility within momentum (as measured by the MAC-D indicator) is widening so risk management is warranted despite CNI being a relatively strong name. I would be cautious about the opportunity should shares break below the $46 - $48 zone, so this may be a good place to apply a stop-loss.

Despite its "old school" image, the railroad industry does have many positives in its favor and should the domestic oil market perform to expectations, we can easily see this sector go along for a lucrative ride.


molycorp

-7.4% between March 6, 2014 and time of writing (Feb 14, 2014)
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The commodities are back! After suffering a multi-year erosion since 2011, when inflation concerns were at their highest, the Reuters/Jeffries CRB index, which features a basket of various commodities to quantify sector sentiment, is on a genuine recovery. The index is up 5.7% to date, ready to take out important technical thresholds. In contrast, the venerable Dow Jones Industrial Average is down -1.7%. Even the hot-flying NASDAQ, the best performing of the three major equity indices, is up 2.4%, meaning that commodities as a whole are moving twice as fast. This is a significant turnaround for the resource sector and many are speculating long on common assets such as gold and silver. While that should be a good decision based on the current fundamentals, investors should also consider other potent alternatives, namely, the rare earth metals.

Molycorp Inc (NYSE : MCP) is one name that's been making a huge splash in 2014, up 16% since bottoming earlier this month. According to their company profile, Molycorp, Inc. produces and sells rare earth and rare metal materials in the United States and internationally. The company's Resources segment extracts rare earth minerals, including rare earth concentrates; rare earth oxides (REO), such as lanthanum, cerium, neodymium, praseodymium, and yttrium; heavy rare earth concentrates, which include samarium, europium, gadolinium, terbium, dysprosium, and others; and SorbX, a line of proprietary rare earth-based water treatment products.

Admittedly, the fundamentals for Molycorp are not the greatest. Concerns continue to abound in the high long-term debt levels relative to cash-on-hand (approximately 13%), as well as its negative cash-flow, which has been nothing short of dramatic. The most critical for investors is the cost of goods sold, which has been higher than actual revenue for several years, leading naturally to negative earnings. This has attracted the bears much like blood for sharks : 52.4% of the float is short.

This may lead to a short-squeeze in the future as a majority of the bearish news, such as a weak commodities sector and in-company scandals, have likely been priced in. Also, fresh-buyers from the $5 discount level and beyond would only exacerbate the situation for the short-siders. Since we are speculating that the financials will improve under favorable tailwind currently pushing the general commodities, technical analysis is our next best tool :

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Since the beginning of February, we have seen 8 consecutive trading days of positive price action. Though the momentum varied in strength, the session ending February 14th put the close near the half-way point between the 50 and 200 day moving averages. Since we are in the very early stages of a potential recovery, the profitability reward is strong since the momentum is suggestive of the 50 DMA crossing above the 200.

There's certainly a lot of legs left in this bull run : the Relative Strength Indicator is only a little bit above the mid-way point, while the Moving Average Convergence-Divergence has yet to fully cross the equilibrium point. Volume is slightly below parity with its 3-month average and this is important because the "dumb money" has yet to flow into this market.

Played correctly with necessary risk management tactics (due to Molycorp's poor financial status), this rare-earth resource company could be a very sizable contributor to your portfolio.


rhino resource partners

+6.92%   between March 6, 2014 and time of writing (Jan 31, 2014)
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The greatest opportunities in life are usually only self-evident in hindsight. In the financial markets, this concept is further exacerbated with the latest flavor of the week culture in Wall Street. Post strong earnings and everyone wants a piece of you. One hiccup and you wouldn't be able to give away shares. While the investment community's herd mentality shouldn't always be dismissed by default, it often pays handsomely to go against the grain when there is a quantifiable reason to do so.

Rhino Resource Partners (NYSE : RNO) may provide that opportunity. According to its company profile, Rhino Resource Partners LP, together with its subsidiaries, produces, processes, and sells various grades of steam and metallurgical coal from surface and underground mines in the United States. Coal has been an ugly market along with the entire commodities complex and with global economic deceleration being the theme of this new year, RNO has not been on the plus-side of the investor's ledger.

This may be a big mistake : fundamentally, Rhino is relatively sound, especially for a resource name. On the income statement, it features positive earnings and cash-flow, while on the balance sheet, total assets outnumber liabilities by a factor of 2.26. As far as debt to equities ratio is concerned, Rhino comes in at 50%. Not great, but certainly not a percentage that would justify panic.

Of course, price action has been volatile in recent years. Much of this can be attributed to earnings deceleration. Wall Street analysts expect fiscal year 2013 to come in around $283 million, which is about 20% shy of FY2012's result. As it stands, we're probably talking about fiscal earnings that will come in around 35 - 45% of prior year, which may have a dramatic impact on its P/E ratio even with the street pricing in the news.

The likely fact that Rhino is headed for near-term volatility is no surprise to anyone familiar with its technical chart :

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Price swings have been steep for RNO shares and will probably turn negative over the next few months, with a downside target of $10.25 a key metric to watch. Should trading activity stabilize, however, it may be a great idea to go long. When you look at long-term momentum indicators, such as the Moving Average Convergence-Divergence, the velocity of bearishness was strongest during 2011, the year that the commodities and precious metal bubble burst. Subsequently, the most bullish momentum play occurred in late 2011, when the commodities market staged one of several ultimately futile reversals. For over three years, a pattern of weaker bearishness and weaker bullishness emerged. This is significant because the trend of stronger support (ie. weaker bearishness) runs contradictory to its recent price action, which has obviously trended downwards.

The weaker bullishness also tells us that the market has exhausted itself of "johnny-come-lately" traders. While this suggests that we may not see a positive breakout in the immediate timeframe, it carries the marginally appreciated result of stability. Once Rhino asserts itself after a challenging year, we could see both explosive and sustainable gains.

Therefore, mark RNO as another idea to keep on your watchlist!

Nucor

+3.75%   between March 6, 2014 and time of writing (Jan 24, 2014)
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One of the temptations (and marketing messages) that comes across to the beginner investor is to buy cheap companies at cheap prices. Going against the herd is a well-worn sentiment that is expressed by various industries and the reasoning behind sounds good, at least on surface level. Lowered valuations are a perfect buying opportunity since the weak hands have left the market...this is a time to get back on the stock before it rebounds to even greater heights. What's often not discussed is that rebounds, while certainly possible, are incrementally difficult for companies that are not financially stable and recovery is never a foregone conclusion, regardless of the strength of the balance sheet. In order to play the "discount investing" game properly, conservative investors should focus on buying strong companies that are undervalued.

Nucor Corporation (NYSE : NUE) recent downturn is a great example. As a manufacturer of steel and derivative products, Nucor, along with several of its competitors, have suffered significant headwind due to PMI slowdown in China and a stubbornly stale domestic economy. What that implies is further volatility for the industry, with Nucor shares potentially facing $46, perhaps even lower :

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Recent sell-offs of NUE are at volumes twice the size of their 3-month average and the bearish sentiment is clearly evident in sharply declining oscillators. The 200 day moving average currently stands at the upper $47 range, but I doubt this would hold, given the overwhelming nervousness in both this industry as well as the underlying benchmark indices. Frankly, a trip to the 52 week low of $41.32 would not be surprising in the least.

But the opportunity for NUE rests with the strength of the financials. While not 100% perfect, the books are very strong, and in recent times, investors had focused on earnings growth, which had recovered sharply from a disastrous fiscal year 2009. Now that trend is anticipated to decelerate, with consensus estimates on revenue for fiscal year 2013 down nearly two-and-a-half percent from prior year. The fundamental backdrop of global economic concerns should drive share prices lower. Over the last 60 weeks, Nucor's P/E reached a high of 38.54 and a low of 15.92 ; at a current P/E of 34.34, there's still some volatility potential ahead.

The main question is, will Nucor be able to survive this latest challenge? Unlike other speculative ventures, this is a company that has been around the block and has overcome challenges in the past. The recent influx of cash investments gives it more flexibility, although rising debt levels are a concern that should not be ignored. Ultimately, there are more bullish factors that are in favor of a turnaround and Nucor should be placed on a watchlist once the bearish speculation dies down.

axiall corporation

+6.41%   between March 6, 2014 and time of writing (Jan 17, 2014)
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As is often the case within the commodities sphere, no asset is an island to itself. Even inherently valuable resources such as gold and silver are cleaned, cut and refined before they ever make to the showroom floor of your local bullion dealership. The default partnership that permeates within this industry allows for long and short opportunities within the same family, in this case, the Basic Materials sector. As we move slowly trek our way into 2014, undervalued assets, particularly copper and the base metals, have witnessed a resurgence. A similar trend is about to develop in the synthetics subcategory.

Contrarian investors are again placing their hopes in the commodities, and thus far, the against the grain strategy is paying off : just last week, the S&P Materials Sector ETF gained +0.83%, one of only three sectors to post positive numbers, behind a surging technology sphere (+1.42%) and slightly ahead of health care (+0.69%). Those that want to leverage additional capital within one of the possible winning sectors of 2014 should consider synthetics, which only account for 0.00006% of a gargantuan industry.

One possible idea is Axiall Corporation (NYSE : AXLL). According to their company profile, Axiall Corporation operates as an integrated chemicals and building products company in North America and Asia... These products are used in various applications, including plastics, pulp and paper production, packaging, chemical intermediates, pharmaceuticals, medical and agricultural applications and paints, acrylics, and varnishes. It also produces vinyl-based building and home improvement products, such as window and door profiles, siding products, pipe and pipe fittings, moldings, and trim and decking products...

As we speak, AXLL shares are approaching undervalued status based on historical growth curves and I will outline reasons why the current downdraft, partially caused by slowing in real estate (which affect Axiall's PVC piping revenue) and a volatile caustic soda market, represent a great buying opportunity :

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At time of writing, AXLL closed trading at $43.19. Based on a growth curve over the last three years, the bearishness is probably not yet complete, with shares likely to drop to $39, with an ultimate trip to $30 not completely out of the question. At issue is not the perceived weakness of the company, but rather, the willingness of investors to continue to pay 18 times earnings at a yield of only 1.4%. The obvious answer, based on the technical charts, is no, but eventually, there's many reasons to believe that the situation will reverse.

First, Axiall is one of the strongest companies on paper, and is what many accountants may label "bulletproof." I hate to use such terms in a variable industry, but it's difficult to argue against strong revenue and earnings trend amidst positive cash flow and a debt to equity ratio of a hair under 41%. When management can keep the big three of income, assets and cash-flow in the right direction, that is an accomplishment that can't be ignored.

Second, fixed costs are moving lower relative to sales, suggesting an efficiency model that is humming on schedule. This trend can be seen in both annualized and quarterly statements and this momentum is consistent with adjustments recorded on the books.

Finally, net cash flow has been in the black over the last two quarters, which is a step in the right direction after previous years saw cash run negative and long-term liabilities rise. If management continues this course, there's a good chance that share prices could nearly double from current valuations. Consensus is somewhat soft for such a strong company and the overall eyes on this stock are limited : should Axiall get out this funk that they're in, this is one of the better names to invest in within the resource sector!

southern copper corp - revisited

+12.2%   between March 6, 2014 and time of writing (Jan 10, 2014)
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The laughingstock and the punch line for many of the mainstream financial pundits will look to kick things off in a big way. I refer to the general commodities sector, with copper in particular an asset of great interest. The most precious of the base metals opened trading last year with a spot-price of $3.65 and ultimately closed the session at $3.73. This past week, trading ended at $3.34, down -10.4% from the 2013 opener. Some mining and production names such as Freeport McMoran (NYSE : FCX) have faired reasonably well in spite of the commodities down draft ; others, including Jiangxi Copper (JIXAY : OTC Mkt), were not so fortunate. However, actual users of copper and other natural resources have been picking up their buying activity in light of the deflationary undercurrents and this contrarian behavior is a perfect opportunity to pick up quality names on the cheap.

The emphasis again must be placed on quality : I did not say buy s****y stocks on the cheap, as the laws of diminishing returns works the other way as well. If you can remember only piece of investment wisdom, remember that! In a deflation, the best companies suffer losses ; the worst go bankrupt. In the case of Southern Copper Corporation (NYSE : SCCO), a market capitalization of $23.2 billion pretty much assures that they're not going anywhere anytime soon.

What makes SCCO so special? From a share valuation perspective, we're looking at a current price ($27.63 as of June 10th) that is only 12.8% higher than its 52 week low. Compare that to the current price being under 34.2% of its 52 week high and you get a sense of the potential opportunity here. What I like most about the "superficial" stats for SCCO is the earnings per share, which stands at 2.07, suggesting that unlike other resource companies, the shares are not diluted and there is plenty of room for additional capitalization should the need arise.

Investors are facing shares that trade at 13.38 times earnings : by itself, this number really doesn't tell us a whole lot, but its financials are revealing. As expected given the terrible condition of the commodities sector in 2013, net earnings on a quarterly basis have come down by a huge chunk (-19% from September 2013's earnings report against the average of the previous three reports).

The technical term for this trend is that it sucks. I know. But the potentiality lies within how management responds to pressure : the village idiot can run a company when sales are up and reflation is the name of the game. What do you do when deflation is king? For SCCO, that answer is expense efficiencies. While 2013 was an underperforming year, the efficiency in doing business increased by a huge margin (+26%) over 2012. That is exciting, innovative thinking and when the underlying market (spot copper) turns around, and it will, the infrastructure is in place to really blow the top off the current share price.

Let's look at another underappreciated variable, the cash to liabilities ratio, which for their most recent reporting shows a very healthy 32%. Against debt, this ratio rises to 42.7%, suggesting that while the company has several recurring (cyclical) and long-term liabilities, SCCO is so much healthier than many companies both within and outside their industry. With the punchbowl of easy sleazy money being taken away by the Federal Reserve, a healthy cash balance is even more critical.

Finally, let's discuss some technical factors :

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Does this look like an inverse head-and-shoulders? This certainly appears to be a case of "if it quacks like a duck and walks like a duck..." but there's real support behind this interpretation. First, the spot-market for copper is poised for a comeback due to the industrial demand overall, where the buying activity is recorded in the Commitment of Traders report. Second, the fundamentals are net positive since the earnings deceleration has a very easy explanation. Third, a recovery for SCCO is aligned with the beginning stages of sentiment reversal for this industry. Therefore, this Elliot Wave pattern has more confidence behind it and this could be one of the best ideas for the resource sector in 2014.

Charles & colvard

-18.96% between March 6, 2014 and time of writing (Jan 3, 2014)
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In the resource sector, common discussion points almost always focus on the metals : base or precious? Copper, nickel and aluminum absorb the attention of those seeking phenomenal gains in the mining industry (at the expense of equally phenomenal risk), while gold and silver are attractive for their intrinsic value and obvious safe-haven status. Hardly anyone talks about diamonds outside the context of the human investment known as marriage.

Why is this? For starters, the assessment of diamonds and other minerals goes far behind its weight and purity : there's an entire school (gemology) dedicated to the science of mineral analysis and quite frankly, represents a bit of a chore for the average investor. Second, and more importantly, the market for diamonds is mysterious for most. It's essentially controlled by a network of cartels who answer to the DeBeers corporation. According to an article published by New York University entitled, "De Beers and Beyond : The History of the International Diamond Cartel*," diamonds based on their actual supply metrics would sell for $2 to $30 if put to industrial use. However, as Nicky Oppenheimer, DeBeers deputy chairman once said, "A gemstone is the ultimate luxury product. It has no material use. Men and women desire to have diamonds not for what they can do but for what they desire."

This desire, and not favorable supply/demand dynamics, is the engine for truly wild gains. Yes, supply/demand relationships are essential for sustainable trend development, but for all out crazy, no such profitability can be attained without desire. It's what fuels so-called speculative investments like bitcoins, which have zero intrinsic value but are evidently desirable (at the current juncture) for a number of reasons.

Investing in the diamond trade is a must for any sophisticated market player : outside of truly extraordinary circumstances, diamonds, not gold, represents ultimate luxury. Even rare gold substitutes, such as platinum or palladium, take a backseat to a beautifully cut diamond. Why that is lies within an even deeper enigma into the mind of a woman...an inscrutability that will never be revealed this side of the Second Coming.

What is important here is that diamonds and associated gemstones are virtually a forever industry : regardless of precious metal spot-price volatility, jewelry related items will always find a buyer, whether irrational or otherwise coerced. Understanding this and recognizing the recovery in the cyclicals, particularly within high-level consumer discretionary items, it's time to go shopping! However, watch out for over-priced names such as Tiffany's (NYSE : TIF) or Blue Nile (NASD : NILE) ; some like Tiffany's are clearly at or near technically overbought levels, while Blue Nile is extraordinarily expensive, trading at over 50-times earnings, the quality of which is suspect. Also watch out for value-traps, with Zale (NYSE : ZLC) being a prime candidate. Despite trading at a "cheap" price relative to its competitors, on an earnings basis, Zale is one of the most expensive names in the industry and is amongst the most debt-laden, with obligations continuing to rise on a quarterly basis.

Instead, look for an underappreciated name like Charles & Colvard Ltd (NASD : CTHR). While technically not a diamond supplier, the moissanite jewels that they distribute are highly desirable and considered a diamond-substitute, with particular optical properties that are superior to traditional diamonds.

CTHR is in the very enviable position of having zero debt, a rarity within this and other industries. To be clear, zero debt does not mean zero obligations, of which they have plenty and has been on a rising trend. However, their in-pocket cash alone can cover nearly 95% of total liabilities, which speaks to their liquidity and the forward-looking opportunities that it potentially provides.

At a tick under $5, CTHR is the cheapest share amongst the jewelry names mentioned in this article. However, do not mistake nominally cheap for qualitatively cheap : its EPS stands at a paltry $0.14, but much of this is due to earnings running negative in the 2nd and 3rd quarter of 2013, a victim of higher than expected business expenses. The all important 4th quarter is where the money is made, and recent numbers suggest that a fiscal year 2013 performance of $28 million in revenue is very reasonable. If so, EPS has nowhere to go but up, which could potentially drop its P/E ratio to the low 'teens. By that time, the smart money should pour in, making CTHR the sleeper hit of 2014.

Technically, the posture of this jewelry stock makes the "undervalued" case more compelling :


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The drop in share price in September coincides with the release of a poor earnings result, which led to the aforementioned sub-par EPS number. This is typical of a jewelry name, which is subject to often extreme swings in seasonality trends. Market conditions are not extremely oversold but are reaching there : an ideal entry point would be around $4.50, where most of the bears should be covered given the risk of an immediate turnaround from a positive earnings number and upbeat forward guidance.


2013 articles

alcoa

+12.8%   between March 6, 2014 and time of writing (Dec 27, 2013)
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As we close off a turbulent year in the commodities sphere, recent developments suggest a rational basis of faith that 2014 will bring better opportunities for hard-asset related investments. While the hyperinflation predictions permeating throughout the blogosphere didn't quite pan out, one fear-based driver is affecting the financial markets : war and the threat of war. The Pacific theatre, most notably North Korea and the South China Sea, have laid witness to endless saber-rattling, and in the former case, there was actual bite to the bark. The next several years will likely see an escalation of this geopolitical hot-spot, thus catalyzing an already lucrative defense industry and the companies that directly partner in this endeavor.

For the purposes of this article, we will be exploring the pros and cons of investing in Alcoa (NYSE : AA), which in addition to providing fabrication services to various industries ranging from energy to consumer electronics, also is a leader in producing military-grade aluminum for vehicular applications. Most investors have been leery of Alcoa, which has seen share prices lose over half their valuation from the 2011 commodities spike. It has been a Dow Jones laggard ever since the aforementioned market collapse and was eventually kicked out of the famous 30-company index earlier this year.

However, that move, while understandable, may have been a big mistake : without the pressure of a "Dow label," Alcoa was free to reinvigorate their company outside the eyes and expectations of the Wall Street elite. Since being removed from the index, Alcoa has charged up over 30%, although it must be noted that it wasn't the most smoothest of rides :


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Regardless, the ride is a believable one : technically, we just witnessed Alcoa blast through a long-term resistance and psychological barrier at $10.00, and is now challenging multi-year highs. With subdued trading this week due to the holidays, I don't expect the company to build off its gains immediately as the market is overheated and volume doesn't confirm the price action. Patience is in order as we allow the markets to dictate to us the short-term trend ; more than likely, we will see a leveling off, which would represent the buying opportunity.

For 2014, Alcoa should challenge the $12 mark : tensions in the Pacific theater have only escalated by all parties involved and the United States military industrial complex is keen on providing "security services" with a smile (and a price). Only the painfully naive would not see through this charade and as a reasonable speculation, Alcoa should benefit. The Japanese military industrial complex, an often disregarded topic, has been given the go-ahead by Prime Minister Shinzo Abe to expand with the not-so-subtle purpose of countering China's militant threats. The Japanese are more than willing buyers, providing the demand engine for America's endless supply of military wizardry.

Forget the illusive war on terrorism! A cold and hot war could break out in Asia at any time and the next commodities craze will involve industrial metals ; that's why it's important to have exposure to companies like Alcoa, which despite mathematically having a very high P/E ratio (38.87, or roughly 130% higher than the benchmark S&P 500), stand to gain very much from geopolitical fundamentals.

Despite many positives, a cautionary emphasis is that Alcoa is financially a speculative investment : while gross margins are "improving," using the most liberal interpretation of that word, net margins leave much to be desired. Their books are replete with non-recurring costs and other volatile variables and therefore, it is difficult to pin down a realistic forecast of their forward-basis cost structure. And although this may be stating the obvious, Alcoa's business plan is inherently commoditized, meaning that at the end of the day, they live and die under a price paradigm. Should the underlying asset (aluminum) collapse, there's no guarantee that Alcoa won't be affected.

However, Alcoa is not completely commoditized as they provide highly specialized fabrications of a base metal, which forms the core of their intellectual property. Since the geo-political demand for this intellect is forecasted to rise significantly, Alcoa represents a far better risk-reward balance than a standard aluminum producer.

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Given the macro-economic shifts that have occurred, in particular, the strength in the automotive industry, it's expected that the spot-price of aluminum will recover after declining over 14% year-to-date. While steep, this is a far-cry from the drop experienced between April 2011 and April 2012, where 23% of valuation was lost after a parabolic spike in the commodities sector. While technical bearishness appears to be exhausting itself, S&P futures and 30-year interest rates are rising, indicating (at least for now) bullishness in consumer confidence. Under those circumstances, cyclicals typically lead the overall markets, and this is exactly what we are seeing. However, rather than jumping on board the cyclical names now, which have undoubtedly seen their financials artificially pumped through seasonality trends, it makes more sense to play the commodities sector that directly affects the aforementioned cyclicals ; in other words, it's time to play the aluminum game!

Aluminum is one of the hardest hit commodities this year, with the spot-price currently reaching multi-year lows :

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Outside of the financial crisis of 2008, spot prices this weak have not been witnessed since the spring of 2005. This is in direction contrast to the market performance of primary users of aluminum such as aircraft and automobile manufacturers, as well as the military industrial complex, with many names within these industries hitting all-time highs. There appears to be a favorable lag between opposite ends of the production line which potentially can be arbitraged through investment in aluminum producers.

One cautionary point that should be noted is the recent volatility swings over the last few months in the aluminum spot-price :

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These price swings may be what technical analysts refer to as a "broadening bottom," a condition associated with unstable market psychology and thin volume. Therefore, a true bottom may not yet have formed and any near-term bearishness could see valuations decline by 2 or 3% from time of writing.

Nevertheless, should a recovery occur, maligned metal producers could dish out wild profits, either through short-term momentum spikes or as a long-term investment. One speculative name to consider is Aluminum Corporation of China Limited (NYSE : ACH). It's speculative because earnings were terribly negative at -$1.4 billion last year, and the company will still be in the red this year, barring a miracle. However, the cost structure in their business has vastly improved in that the velocity of decline in their pre-revenue expenses have slowed significantly. Cost of business is still unacceptably high, although a change in the underlying market could go a long way in rectifying this. Finally, the smart money invests in what will be, not what is. By the time ACH returns to profitability, the opportunity would have already been priced in.

While the fundamentals don't give us a whole lot to cheer about, there's enough in the technicals to warrant our attention :

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From July 2009 to September 2011, share price for ACH declined by nearly -64% based on a monthly average. From September 2011 to November 2013, shares decreased by -13.4%. Throughout this time, we have seen volume average around 1.7 million at the peak to about 180,000 over the last 12 months. This is nearly a -90% decline in market interest, and a -68.6% freefall from peak levels to current valuation.

However, most of this decline occurred between 2009 and 2011, suggesting that bearish trading activity is just about done. ACH in 2012 maintained a respectable 28% cash-to-debt ratio and as manufacturing picks up throughout the world, we could see speculative money pour into the company at these attractive prices.

iamgold corporation

+14.5%   between March 6, 2014 and time of writing (Dec 13, 2013)
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It has not been a pleasant year for holders of IAMGOLD (NYSE : IAG), especially under the backdrop of enormous valuation erosion in the gold bullion market, making an already volatile mining sector even more of a stomach-churning experience. Earlier in the week, the company also suspended dividend payments pending further notice, a common road traveled within the industry. However, that was little solace to dividend investors, many of whom were holding IAG stock for its "generous" yield of 6.1%. With the stock down a mind-boggling -70% year-to-date under extremely heavy volume, has the worst faded or is this simply the beginning of the end?

Let's start with a few basics : dividend suspension is not a kiss of death. It is a symptom of either an unhealthy company or an unhealthy industry, or in IAG's case, both. But the suspension itself is not the root cause of the dilemma. Taken from another perspective, it can be a sign that the company is addressing the financial controls that will affect its sustainability. In other words, management is taking the pain now to better ensure its future success.

For IAG, this was probably more force than choice : amongst publicly traded precious metal mining companies, IAG has very poor gross margins, margins of which have been declining on an annualized basis. What makes matters worse is that the Wall Street consensus for fiscal year 2013 revenue is $1.23 billion, -26% below FY12's number. Even the high-end targeted revenue is -20% lower than prior year. This adds pressure to the company since the industry itself has seen a lift in mining costs, so the profitability support has to come from somewhere besides front line sales. Aside from cutting workers and other investments/assets, a somewhat easy cut can be made in the dividends department.

It's only somewhat easy because the market reaction is usually bearish : average volume over the past three months is in the neighborhood of seven-and-a-half million shares. During last Wednesday's (Dec 11) sell-off, volume approached 30 million, an increase of over +250%. So while the dividend cut may be popular amongst the rank-and-file of IAG, capital liquidity is a concern moving forward.

With the volatility over the years, shares are trading with a P/E ratio of 14, roughly 18% lower than the P/E of the SPDR S&P 500 exchange traded fund (NYSE : SPY). Can a case therefore be made regarding IAG's "undervaluedness?"

The question from a technical perspective can be answered differently according to variant time frames :

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As a short-term swing trade opportunity, an investor will be looking to play the dead-cat bounce. Ideally, one would like to see IAG jump between $3.75 to $4.00, for a profit move of 9.3 ~ 16.6%. Anything higher than that would be speculative and may likely require significant help from the underlying bullion market, which has been an undependable partner as of late. Still, the ins-and-outs of daily price ranges makes IAG a swing trader's best friend.

Long-term, the risks simply outweigh the rewards : fundamentally, the company has taken on twice as much liabilities as it has over the years 2010 and 2011, nearly 40% of which is attributed to long-term debt obligations. This is counterbalanced by only a 37% lift in net assets, and a 23% increase in liquidity over the same time period. The financial balance obviously leaves much to be desired.

And then the kicker of course is that you, as the investor, are paid ZERO dollars for holding onto this risk, making IAG a pure capital gains play. That very likely means that the volume that bought into IAG currently is sitting with the "weak hands" of the market. A long time could expire before IAG becomes palatable again to traditional, "strong hand" players, reaffirming my position that this company is a short-term swing trade opportunity. 

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With the Gold Miners Index (NYSE Arca : $GDM) down more than 56% year-to-date and the underlying Gold & Silver Index (Phila Index : $XAU) losing 52% over the same time frame, some are beginning to place contrarian hopes of a turnaround. For example, a Motley Fool article by Rupert Hargreaves, a former FOREX trader, cites dwindling bullion supply, specifically record level claims of ownership (65) per ounce of gold held within the COMEX vaults. It's speculated that the number of simultaneous claims for the same gold bullion will drive up the spot-price as people rush to take physical delivery, and thus provide a positive catalyst for a deflated mining sector.

While this story has a persuasive tone, it is outdated and, most importantly, inaccurate. Without getting into a drawn-out debate, I need only point to the sudden rise of Bitcoin as proof that the COMEX inventory discrepancy, while a noteworthy sidebar, has very little relevance to directional profitability...after all, that IS what we are after, is it not?

Bitcoin, the most popular "cryptocurrency," is not issued by a central bank, or even a centralized source : like gold, it is "mined" through a complex series of computer algorithms. The time and energy cost expended to mine one Bitcoin prevents arbitrage from semi-interested couch-potatoes. Essentially, it has all the components of gold as a safe-haven asset, except one : you can't eat it. In fact, you can't even hold it because it's not "real," according to our tangible definition of the word.

How then could Bitcoin reach parity with gold bullion, before crashing down to about $800 at time of writing? In a post-apocalyptic scenario, you want to acquire hard assets, things that are utilitarian or medicinal. Obviously, food items and water would be the most critical, and cost-intensive, resource. If the economy were to collapse, I'd definitely want to be a protected holder of gold and would count myself amongst the masses of hysteric humanity attempting to take real, physical delivery.

However, financial markets don't operate on such hysteria. Sure, the occasional depression and flash crash will bring out the worst in panicked behavior, but by and large, the fair market valuation component of stock/commodity investing operates on psychology : what is someone willing to pay for any particular asset, and more to the point, what is someone willing to take in exchange for said asset?

The forecasting models that are being built everyday to answer that question is the reason why the financial analysis industry is both competitive but extremely lucrative. The question at this juncture really has no answer, but the allure of finding one drives the greatest minds across diverse fields of academia . Of course, it also drives any individual wanting to promote a "get rich quick" scheme, and thus, the internet is full of inaccurate assertions masquerading as facts.

One thing is clear : delivery of supply is NEVER the reason why an asset will increase in value!! This applies to gold, silver, aluminum, uranium and any other commodity. Even after absorbing a 50% haircut, someone, somewhere is willing to pay $815 for one Bitcoin. In fact, the volume suggests many someones and many somewheres. In contrast, many gold bugs are still waiting for that "moment," citing the above tired sentiment.

As a gold and commodities investor, there are 3 strategies to employ :

  • Legacy - Long-term wealth protection where annual volatility is not the main concern

  • Capital Gains - Classic arbitrage of buying low to sell high

  • Productivity - Since gold earns no interest, investing in the miners provides passive income

Of the three strategies, productivity will likely lead to the greatest gains (and the greatest losses if the directional bet is wrong). However, in order to be successful in this approach, an investor must employ the same disciplines that goes into determining whether any business has a sustainable future or not. This means a tremendous volume of work is necessary, especially in the field of fundamental analysis.

Specifically regarding resource investing, there are likewise 3 key components to analyze :

  • Quality - Mining ore grade and forecasted recurrence

  • Performance - Earnings velocity and inter/intra - strength studies

  • Health - Does the company run a sustainable business model?

Deficiencies in any one of these components must be accounted for in the investment potentiality assessment. A financial analyst is trained to provide these warnings. Financial forecasting, of which I specialize in, accounts for a fourth dimension : projected deficiencies.

Regardless of methodologies selected, there are standardized research models that must be run through in order to swing the odds in your favor. While the gold mining sector has many positives to it, the only way investors can hope to succeed is by employing rational disciplines. The sidebar is a cute but untrustworthy distraction. 


sjw corporation

+5.17   between March 6, 2014 and time of writing (Nov 29, 2013)
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One of the advantages of resource investing is coming across diamonds in the rough that are poised to make strong moves. Because the sector itself has relatively fewer participants compared to popular industries such as consumer retail, an investor is more likely to be at ground-zero of an explosive rally as opposed to being suckered into price-chasing euphoria. Often times, an opportunity is staring right at us : all we have to do is recognize it!

For this edition of the Resource Times, we will be discussing the financial benefits of water. That's right, good 'ole H2O. We know what drinking eight glasses of water can do for your health, but this overlooked sector can become a big player now and well into the future. There are a few ETF's that can track the performance of water as a commodity (as I'm sure most would find "stacking" it a laborious task), but there are advantages to owning specific companies that specialize in water production and filtration.

One such name is SJW Corp (NYSE : SJW). According to their public profile, SJW Corp., through its subsidiaries, operates as a water utility company. The company operates through two segments, Water Utility Services and Real Estate Services. It engages in the production, purchase, storage, purification, distribution, wholesale, and retail sale of water.

Although there are companies that on paper provide better returns for investors, one of the key factors to consider for SJW is its leverage to debt compared to others in its industry :

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With a Debt to Equity ratio of 107.3, this is nearly 75% lower than its competitors. In fact, one of the big risks associated with water companies is their often limited on-hand liquidity against current and long-term liabilities and while the cash-to-debt metrics for SJW on a stand-alone basis is not necessarily confidence inspiring, it fares much better than many of the investable names in this sector.

Another fundamental factor to consider is the return on operating investments relative to earnings growth. While the Street expects top-line annual revenue to improve by 7.6% over the prior reporting period, SJW is likewise seeing a strong lift in their operating ROI that is used to generate the aforementioned revenue acceleration.

Finally, there are bullish technical reasons to invest in SJW :
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Despite it having a "choppy" nature, shareholders have done well keeping SJW on their list of "legacy" stocks, and as the old adage goes, the trend is your friend (until it ends). But will it? The fundamentals do not confirm a bearish outlook, as revenue and margins are both trending strongly. Technical indicators are stable and neutral, which has a tendency of capping upside moves but conversely limits stomach-churning volatility.

The Street's consensus share price target is $30, which equates to a 9.2% lift from current valuations. It is not a "ten-bagger" and will likely not be ; however, we've all heard the stories about "to the moon" prognostications gone awry for other assets. Personally speaking, a good investor should never scoff at any form of profitability, especially when the odds favor the investor, and SJW's risk-reward posture for attaining its consensus target is indeed encouraging. By carrying this as a long-term "legacy" stock, the payoff could be pleasantly surprising!   

contango oil and gas company

+0.88%   between March 6, 2014 and time of writing (Nov 22, 2013)
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A surprising story within the recent deflationary spiral of the resources sector is crude oil. Often considered the king of commodities due to its ubiquitous demand and often-controversial sources of output, black gold (the West Texas variant) took a hard tumble in early September after the much hyped strike on Syria by U.S. forces never occurred. That in and of itself was an unexpected turn of events as the Obama administration risked looking impotent in front of the global community. Nevertheless, our bombs (at least officially) never dropped, and the speculation that had been driving the bulls took a sharp correction. However, that has not erased some of the investor enthusiasm towards oil companies : large conglomerates such as Exxon and Chevron have seen strong upward swings in valuation recently, but the smart money may be better served by looking at the smaller, independent names.

Today's article will feature Contango Oil & Gas Company (AMEX : MCF). According to their company profile, Contango Oil is an independent natural gas and oil company, explores, develops, produces, and acquires natural gas and oil properties primarily offshore in the shallow waters of the Gulf of Mexico. The company was founded in 1986 and is based in Houston, Texas. 

The appeal from a value-play is that MCF is in a "recovery mode..."

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Revenues averaged $190.5 million in fiscal years 2011 and 2012 (when share prices often hovered above $60) but the following year brought a significant downturn, with revenue for FY 2013 dropping to $127M. The current fiscal year (2014) is on pace to exceed $132M, although that represents a marginal 3.9%. However, with share prices now around $50, a move to previous highs would net a cool 20%.

Fundamentally, there are several elements that investors will key in on :
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First and foremost, the net profit margin for MCF is astronomically above the Independent Oil & Gas sector's average (+690%). While abnormal statistics such as this can be the result of a negative discrepancy, Contango Oil has very strong cost controls. An example of this is in their financial statements, which reveals that in their most recent quarterly report, their liquid cash accounted for 82.5% of total liabilities. Over the last four quarters, liquid cash accounted for an average of 62% for the same metric, revealing that this is not an anomaly.

Yet due to the downturn in the crude oil markets and the company's own losses, some of which was as a result of poor investing choices, MCF's P/E ratio is 19.3. While that is somewhat high compared to the benchmark S&P 500, against the independent oil sector, this is -42% below average, which indicates a potential undervalued play at work.

Finally, let's review the technicals :

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As with several other oil companies, MCF is currently overbought and a healthy correction is likely due, with a downside target between $43 - 45 per share. Wall Street analysts have a consensus target of $52, although probability models garnered from other disciplines within technical analysis propose a higher target of $64. While lofty, this was the high for MCF only a few short years ago.

With many retail investors focusing on the mega-caps, savvy buyers can pick up under-appreciated names for a discount and a greater risk/reward profile amongst the independent names. Contango Oil fits the bill with technical potential, as well as strong fundamentals.

us ecology inc

+5.65%   between March 6, 2014 and time of writing (Nov 15, 2013)
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In the commodities sector, much of the attention is centered towards accumulation of natural resources and fungible elements, such as gold and silver bullion. Rarely is there a discussion on the management of said assets, ranging from storage processes and waste removal. While the input variables garner the most airtime due to psychological tendencies (we talk about how food tastes, not how it exits us...), the output is just as important, if not more critical. A plan without an exit strategy is really no plan at all, and the same concept can be applied to the resource sector.

This week's article will feature US Ecology Inc. (NASDAQ GM : ECOL). According to their company profile, US Ecology, Inc., through its subsidiaries, provides waste treatment, disposal, recycling, and transportation services to commercial and government entities in the United States. The company offers treatment and disposal services for radioactive, hazardous, polychlorinated biphenyl, and non-hazardous industrial wastes.

Fundamentally, ECOL is poised for significant and sustained growth :

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Over the last three annual reporting periods (fiscal years 2010 - 2012), average revenue growth was +28.4%, and this year, the top-rated target amongst Wall Street analysts is that FY13 will exceed $194 million. This will be a 15% lift from a banner year in 2012, and based on quarterly earnings trajectory, this lofty target is quite realistic.

Why investors need to key in on ECOL, however, is due to the company's cost control procedures. Even though their top-line earnings is moving at a brisk pace (indicative of a robust industry sub-sector), their cost margins are even more bullish. Using quarterly projections, it can be estimated that cost of goods sold (COGS) will line up at around $116 million, which suggests that their gross profit will be somewhere in the neighborhood of $78 million. If so, that will rate ECOL's average margin over years 2010 - 2013 a robust +26%.

Because of this and other factors, ECOL stacks up nicely against the competition :

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ECOL's strong cost-management strategy has allowed it to trounce the waste management industry with a net profit margin of 19.5, a +457% gap over the competition. Return on Equity is also much higher, with ECOL running +212% higher than the sector average. In nearly every quantifiable metric, ECOL wins out. The only "sour spot" is its P/E ratio, which at 22.8 is significantly higher than the benchmark S&P 500 index. However, compared to the waste management industry, which on average runs a P/E of 27.3, ECOL is -16.4% lower.

Finally, let's discuss the technicals :

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It's like that in the short-term, the share price will pull back, with a logical downside target being the 50 DMA at around $31.50 ~ $31.70. The Relative Strength Indicator is showing somewhat overbought and the MAC-D may be signaling sentiment deceleration. However, investors must remain cautious against being overly bearish, as any downside is more likely to be "noise" than anything that could reverse a major trend. Remember, if technical momentum and quarterly performance are both in-sync, you never want to fade (go against) strength.

Bottom line : as with any good company, it's all about people, people, people. ECOL's numbers shows that they run a tight ship and this is one of the few bright spots in an otherwise drab sector.


mineral technologies

-3.96% between March 6, 2014 and time of writing (Nov 11, 2013)
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One of the great advantages of investing in the resource sector is the existence of diamonds in the rough, or fundamentally strong companies that just happen to be involved in unloved industries. Such is the case for Minerals Technologies Inc. (NYSE : MTX). According to their profile on Yahoo! Finance, MTX is a resource and technology based company, develops, produces and markets a range of specialty mineral, mineral-based, and synthetic mineral products; and supporting systems and services worldwide. It operates in two segments, Specialty Minerals and Refractories.

One of the defining characteristics of MTX is their focus on sustainability : this is a company that values consistent earnings over swinging wildly for the grand-slam homerun. That's a unique position within the resource community, which has a tendency of attracting pump-and-dump schemes, but MTX is no boiler-room operation :


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Wall Street analysts expect a realistic high-side target for fiscal year 2013 earnings to hit $1.02 billion, which is virtually at parity with previous earnings results. However, the cost margins are not at parity, with a 1.9% spread between earnings and COGS velocity. This is a clear, but subtle sign of MTX's financial acumen.

How does MTX stack up against their competitors? Quite well, actually ...

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We just mentioned the financial acumen of MTX as a unique characteristic within the resource sector, and its Debt to Equity ratio of 10.9 against the synthetics industry average of 152.9 drives home this point perfectly. What typically prevents average investors from committing capital to an opportunity is a high P/E ratio, of which MTX does generate a lofty 26.2. However, that would be a very poor and inaccurate metric to use as a forward indicator if one doesn't understand the nuances that drive formulaic results.

In the case of MTX, their core strength lies in the ability to control their books : it may not be the sexiest way of returning gains for their investors, but a conservative approach does work. For the management team's efforts, MTX was able to generate a ROE 266% higher than the sector average. Also, net profit margins, the real component of a company's success, is 352% higher than the competition.

Finally, let's discuss the technicals :

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The aforementioned high P/E isn't always a "bad" thing : it could indicate the "momo" players unwillingness to continue holding a long position that is speculated to wane in upside momentum. Psychologically, this could lead to a drop in sentiment, and therefore, market valuation, and this is exactly what I would expect.

Look for a downside target of $50 - $52, with a more aggressive decline potentially finding bottom at $45. Depending on the investor time horizon, any price within this range could be attractive, considering the Street's expectation that FY14 earnings will increase by nearly 4%. With strong fundamentals, and a methodical capping of liabilities, Minerals Technologies Inc. is one to keep on the playbook.


potash corporation

+13.4%   between March 6, 2014 and time of writing (Nov 1, 2013)
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A recent downturn in the agricultural sector, specifically with phosphate and potash fertilizer spot-prices, has created a unique and highly favorable investment opportunity in an often neglected market. How often have you heard of anyone trading fertilizer futures? If you're like most of us, the answer is, not much! Yet this is exactly the type of environment that investors should seek in order to exploit undervalued companies that are virtually destined for a substantial rebound.

Potash Corporation of Saskatchewan Inc (NYSE : POT) produces and sells fertilizers and feed products primarily in North America. Since November of 2011, the retail potash fertilizer price has been in decline, with the current valuation hovering around $530 per metric tonne (approx -26% loss between Nov 2011 to Nov 2013). This downturn contributed to an earnings miss in the third quarter, where top-line revenue dropped -30% from the prior reporting period. Year-to-date, shares are down nearly -23%.

The subsequent sell-off in the markets was predictable like clock-work in earnings hungry Wall Street, where analysts from HSBC Securities, UBS, and Dahlman Rose downgraded their forward-basis outlooks. The opinion of how Potash Corp will perform for Q4, and thus the remainder of fiscal 2013, is split widely, with a consensus spread of over 15%. The forecast for fiscal 2014 is even more heavily disputed, with a consensus spread of 38%.

Such discrepancies ensure that there will be many analysts and hedge funds caught off-guard, which is a shame since so-called top investment firms are clearly not doing their homework. The earnings tell only one side of a very complicated story ; the other consideration that is clearly missing is the margin curve, which on both a quarterly and annualized basis is very stable. This indicates that management understands the risks involved with the business and have drawn down their costs accordingly.

One of the concerns regarding the underlying fertilizer spot-market is that an increase in domestic supply is indicative of declining global demand. What exacerbates this problem is the fluctuations in the currency market, where emerging markets such as India can be negatively affected by the existence of a second variable. The sharp drop in fertilizer prices is coming at a time when many in the agricultural industry are holding onto heavy inventory levels, a factor that could pressure margins in the fourth quarter.

While inventory levels have certainly risen at Potash Corp, it's only on a technical basis, as an average lift of 1.2% is hardly cause for alarm. Also, the spot-market is unlikely to erode further, as India and China are positioned to support prices in order to feed their burgeoning societies. Finally, a weaker dollar would generally increase commodity prices due to inflationary implications.

When Potash Corp is placed head-to-head against its competitors, that's when its star truly shines :


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In most of the key comparison metrics, Potash outperforms the Agricultural Chemicals industry : one of the most impressive examples is the net profit margin, which is 36% higher than sector average. This is especially important since the entire sector is under pressure from a poor supply-demand curve and is therefore indicative of an agile management team. Potash also uses significantly less debt to subsidize its business operations, a critical and overlooked component of its ability to stay ahead of the pack.

Finally, let's consider the technical picture :

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In the interim, Potash may still come under pressure : in the eyes of many, the commodities market is unconvincing and a deflationary environment would worsen the supply overhang within the fertilizer industry. The technical price action currently appears lethargic and we may enter a consolidation for the next few months.

However, like any good long opportunity, the true valuation of Potash is not yet seen : once the Street recognizes how well-run this company is, and once we see a recovery in its underlying market, it'll be off to the races. Of course, by then, much of the euphoria will take the shine off the opportunity. Luckily, we're in the beginning stages of a very robust rally.

Look for a price target of $40 by the end of 2014, for a percentage gain of 27%.


southern copper corporation

+6.9%   between March 6 2014 and time of writing (Oct 24, 2013)
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Understandably, much of the resurgent optimism in the resource sector is focused on the precious metals, particularly gold and silver, as a weak underlying economy and accommodative monetary policies have fueled significantly higher prices over a short period of time. With these fundamental tailwinds, physical bullion, "paper" ETF's, and the miners offer plentiful opportunities for long-side exposure. As great as the recent recovery has been, an astute investor may also want to consider alternatives to safe haven assets.

While gold and silver get plenty of attention in the financial press, copper is the crown jewel amongst base metals. In fact, much of the chemical properties that are associated with silver are also found in copper. For example, copper is ductile, malleable, and is an excellent conductor of heat and electricity, while being resistant to corrosion. It is also an essential nutrient in our daily diet and features antimicrobial properties that help prevent infection. All this, at a much, much cheaper price than silver!

Unlike silver, the spot-price of copper really hasn't caught on with the precious metals complex. While silver is up over 23% from its June bottom, copper is comparatively up only 9%. This makes it a very interesting (and ignored) play, but for base metals, the premiums are often too prohibitive to buy physical copper bullion ... yes, there is such a thing! Plus, the significantly lower spot valuation compared to precious metals necessarily means that physical ownership would involve a massive commitment to storage space. Therefore, the mining industry provides a far more convenient and profitable opportunity.

Southern Copper Corporation (SCCO) fits the bill for an underappreciated, but stable company that is likely headed higher.


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One of the most impressive qualities about SCCO is its net profit margin, which is 27% higher than the copper mining industry average, which already features one of the highest margins as a sub-segment of the Basic Materials sector. This is buoyed by a Return on Equity valuation that is 63% higher than the sector (copper) average.

By itself, the P/E ratio is considered "normal," although against other copper miners, it is on the high side (+29.5%). Also, the amount of debt used to finance operations is slightly above parity with sector averages, although this should be tempered with the fact that total liabilities are declining over the last two quarters.

But the biggest boost in SCCO could come in the form of a recovery in the underlying copper spot market; even a small lift could prove tremendously profitable. For instance, the quarter ending December 2012 featured several months when the copper price was on a rally while the crude oil market was in decline : this contributed in boosting revenue and reducing costs. The quarter ending June 2013, however, saw a severe drop in copper and conversely, the beginnings of a powerful rally in crude. This predictably led to an erosion in top-line revenue and higher costs, a double no-no.

But the current copper price is 9.1% below the average spot-price for the 4th quarter of 2012, while SCCO revenue declined by 15% from December to June (reporting periods). An increase in spot valuation towards 2012 levels would see a lift in revenue, returning margins back up to normal levels. A deflation in the energy market will also help with cost margins, bringing up a net income curve that has come under pressure due to the poor fundamentals earlier this year.

Now let's discuss the technicals :

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SCCO failed to break out of a bullish pennant formation in late May of this year, which in hindsight was a false signal. From there, it declined rapidly before finding support at the $26 level. We know that the reversal that is currently playing out from the August bottom has a greater likelihood of success due to the fact that the price action is shifting away from the overall downtrend that began at the start of this year, and the troughs are moving higher as well.

However, the risk is that the price action continues in a consolidation pattern : this would immediately negate options as a capital gains opportunity, since neither calls nor puts are likely to move in a directionally significant manner. A consolidation would also add time cost to any capital invested; but, those not seeking short-term thrills could benefit from a stalwart in an important, but underappreciated industry.

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