The News Gets Worse, So We’re Buying Resource Stocks…

If you own resource stocks, you don’t need us to tell you it has been a torrid two years.

The gold price is 30% below the 2011 peak, and the S&P/ASX 300 Metals & Mining index has lost a whopping 40.6% since April 2011.

And with headlines in the press talking about the ‘Economy at a turning point’ and ‘Mining sentiment in free fall’, only a lunatic would even consider looking at mining stocks today.

That’s where we come in. This is exactly why we’ve just tipped three mining stocks in the past six weeks.

As a contrarian investor, those are exactly the headlines to give us confidence that a rebound in resource stocks is on the way…

But not everyone agrees with our view.

You can probably imagine that we’ve received plenty of mail from readers who think your editor is a traitor because we’re not calling for the market to crash.

The gist is they aren’t happy with our view that the Australian share market is heading towards a record high of 7,000 points in 2015.

These readers say we don’t understand that the world economy is stuffed and that we’re foolish for buying stocks when a crash is imminent.

All we say to those folks is that they don’t understand investing. The stock market doesn’t care what any one individual thinks. The market merely reflects the views of the investors who transact on any given day.

And right now, our view is that market sentiment is changing and resource stocks will be one of the best opportunities through the rest of this year…

No Wonder Resource Stocks Have Fallen So Much

We’ll give you an example. If we had stuck our head in the sand and kept saying ‘the market is crashing’, Australian Small-Cap Investigator subscribers wouldn’t have backed the small-cap uranium stock we tipped last month.

That would have been a shame because it’s up 42.9% in just a few weeks.

And if we had been too scared to back two metals stocks just two weeks ago, Australian Small-Cap Investigator subscribers would have missed out on gains so far of 8.6% and 4.3%.

Not to mention the 121.9% gain on a specialist medical stock we tipped last September. That was before stocks began their yield-chasing rally. Folks called us mad back then, and they call us mad today.

But that’s fine. We’re thick-skinned.

After all, we see it as our role to give you our best useful, actionable investment advice. Right now, our best investment advice is to buy resource stocks.

We’ll admit that flies in the face of conventional wisdom. Take these charts from yesterday’s Australian:

Source: The Australian

In 2012 all mining companies surveyed by Newport Consulting were either increasing or maintaining capital spending on mining projects.

One quarter of those firms were ‘significantly increasing’ capital investment.

Roll forward to 2013 and things have changed. Now 86% of firms are either reducing or not increasing capital spending. That’s bad news for the resource sector…very bad news.

And it’s not the only report to paint a bad picture of the resource sector. Take this from the Age:

The mining investment boom is winding down sharply, with the next few months set to be a turning point for the Australian economy, a report by a leading business advisory group has found.

The value of planned projects, those under consideration or possible, fell 14.3 per cent, or $68.3 billion, from the last quarter, said Deloitte Access Economics in its Investment Monitor June-quarter report, published on Tuesday.

With that news, it makes sense that resource stocks have fallen so much. But let’s look at it another way. Let’s say you knew nothing about investing and someone asked your opinion on what effect that news would have on mining stocks.

Our guess is you’d say, ‘Sell.’

And that would be a fair answer. But what would you now say when we showed you this chart:

S&P/ASX 300 Metals & Mining Index

Source: Google Finance

We bet there’s a better than 50% chance that you would say, ‘Buy.’ At the very least you’d stop and think about it.

Have the Markets Already Priced In the Bad News?

After all, isn’t the object of investing to buy low and sell high? And if you agree that markets are forward-looking, anticipating future good or bad news, isn’t it fair to say that resource stocks began pricing in this week’s bad news two years ago?

Of course, we don’t know that for certain. We thought the mining rout had ended about three months ago. We got that wrong. And we could be wrong this time too.

But we don’t think so. If you’re a speculator or a contrarian investor you should always look out for opportunities to buck the market trend…and get in on a turning market before the rest of the crowd gets the same idea.

We won’t kid you, it’s a risky move. And it’s not for everyone. If you’re the type of investor who prefers surer things then you should probably wait until it’s clear that mining stocks are trending higher.

And that’s fine. It just means that if we’re right, you could miss out on some of the biggest gains if this is the resource rebound we’ve been waiting for.


From the Port Phillip Publishing Library

Special Report: The Sixth Revolution

Markets and Money: Australian Property: Crazy Bullish or Just Crazy?

Money Morning: Why You Should Be ‘Hands On’ When Investing Your Money

Pursuit of Happiness: Save Now to Avoid the Government’s Retirement ‘Labour Camps’

Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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