What has been one of the worst performing sectors on the Australian stock market this year?
If you answered ‘banks’, you’d be right. The S&P/ASX 200 Banks index is down 13.7% year-to-date. And it’s down 28.4% since March 2015.
That’s bad. What makes it worse is that so many Aussie investors have so much of their wealth tied up in one or more of the big Aussie banks.
On the flipside, what has been one of the best performing sectors on the Aussie market this year?
If you answered ‘resources’, you’d be right there too. Since the start of the year, the S&P/ASX 300 Metals and Mining index is up 29.4%.
That’s a stunning gain. More so when you consider the S&P/ASX 200 index is down 1.3% year-to-date.
Now, it hasn’t been all bright lights and superstardom for the resources sector. Even with this year’s bounce back, the index is still down 54.7% since the sector peaked in 2011.
However, despite the stunning start to the year, it’s a mistake to think that all resources stocks have performed equally well.
Looking at the subsectors of the Metals and Mining index, there is a standout performer. Across the 13 members of this subsector, the average return is 129.5%.
The biggest return was 756%. The worst return was 31.4%.
The even better thing is that, despite these stocks being among the biggest 300 stocks on the ASX, (bar one) they’re still tiddlers. Remove the biggest, which has a market cap of $16.5 billion, the next biggest stock has a $4 billion market cap.
The smallest of the stocks in this subsector has a market cap of just $417.7 million. And that’s the market cap now…after a 178.6% gain this year.
But let’s break this down further. Let’s ignore the ‘big’ stocks. Big stocks are fine, but they generally aren’t where you find the most excitement in the market.
To find that, we screened for stocks in this sector with a market cap less than $100 million. Screening in such a way is easy, but it doesn’t tell the whole picture.
For a start, by only selecting stocks with a market cap less than this amount, you’re filtering out the stocks that started smaller, but grew to be greater than a $100 million market cap.
Also, screening this way means that you include stocks that were bigger, but have fallen into this level. In other words, the data is tainted because (for want of a better expression) you’re excluding the ‘wheat’ but including the ‘chaff’.
If you get the drift.
But regardless, it’s still illustrative. Because worthy of note is the fact that they 10 best performing stocks in this sector, ranging in year-to-date returns from 224% to 740%, have market caps no greater than $51 million.
The smallest of the top 10 has a market cap of just $3.8 million…and that’s after it has already gained 250% so far this year.
These are stunning gains. But if you’re as familiar with small-cap stocks as I am, these numbers won’t surprise you.
So, just what is this sector, and why take the effort to bring this to your attention? The answer to the first is simple, and I’ll explain that today. The answer to the second is relatively simple too, but the explanation can wait.
The sector that we’ve put under a telescope today (we certainly wouldn’t claim that we’ve put it under a microscope) is the gold stock sector.
Aussie Gold Stocks
Gold stocks have been among the market’s best performers this year. That goes for big gold stocks and tiny gold stocks. Even gold stock giant Newcrest Mining Ltd [ASX:NCM] is up 64.6% this year.
Australia’s next biggest gold miner, Northern Star Resources Ltd [ASX:NST], is up 47%.
Both are great results.
But while those stocks may have performed well, let’s be honest, a 64.6% gain and 47% gain aren’t really the type of returns to overly excite anyone. Not that you’d sanely reject those gains if offered. It’s just that, well, when you invest in resources it’s because you’re after big triple-digit, and hopefully, quadruple-digit gains.
Gains such as the 740% from $23.2 million market capitalised Exterra Resources Ltd [ASX:EXC]. Or what about the 425% gain from $14.4 million market capitalised Golden Rim Resources Ltd [ASX:GMR].
Finally, how about the 370% gain from $17.5 million market capitalised Barra Resources Ltd [ASX:BAR].
Remember, these are the stocks’ market caps after they’ve turned in a triple-digit percentage gain. And furthermore, even after the stunning start to the year for gold stocks, none of these are trading at their 52-week high.
Sure, a bunch of the big gains in gold stocks came earlier this year as the gold price climbed and the prospects for further interest rate increases seemed unlikely.
But we’ll argue, what’s changed? The gold price has eased somewhat and gold stocks have fallen from multi-year highs, but does it really seem likely that any central bank, including the US Federal Reserve, is really in a position to raise interest rates?
We wouldn’t put our money on it. But we would put our money on rational speculation in gold stocks.
I won’t claim to be an expert on the mining industry. But, I do know gold. And I know the factors that cause the gold price to rise and fall. And furthermore, I know that issues at play in the world’s economy right now make me believe a much higher gold price over the medium to longer term is a certainty (as I say, in my view — I could be wrong).
If I’m right about where gold is heading, even if it only gets to half of Jim Rickards’ US$10,000 target price (more on that soon), it’s hard for me to believe that gold stocks, and tiny gold stocks in particular, won’t follow suit.
That’s why as publisher, I’m about to place a big bet on gold and gold stocks. Amazingly, this will be the first time in Port Phillip Publishing’s history that we’ve ever done something with a 100% focus on gold.
It’s exciting, and I’ll have more details for you soon.
Editor’s note: The above article is an edited extract from Port Phillip Insider.
From the Port Phillip Publishing Library
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