Uranium: When Price and Value Diverge, There Is Opportunity
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
When the price of pet rocks crashed in 1976, that didn’t make them a bargain.
When the share price of my favorite silver stock dropped 50% over the last year, with no serious bad news from the company, that was a bargain. After this month’s rebound, I’m up 10% over my average cost. I still see it as a bargain.
The stock of one of my favorite gold plays also dropped about 50% last year, on bad news that was specific to the company. But the news didn’t change the value proposition of the speculation. By the math, it was a bargainâ€”one that took courage to act on. As of yesterday’s close, I’m up almost 15% over my average cost on that one.
All of these are examples of the adage of markets being voting machines in the short term, and weighing machines in the long term. Less poetically, they are examples of price and valueâ€”which are not the same thingâ€”diverging due to investor “sentiment” and then converging again. Sentiment, of course, can be manic or panic.
In the case of the pet rocks, whatever “real” value they had, it was far less than the price. Eventually, the price had to crash back to realityâ€”and it did.
In the case of the gold and silver companies above, share prices didn’t have to rise to reality. Sudden disaster is always a possibility when it comes to mining. But the odds favored share prices rising back toward realityâ€”and they did.
I learned this lesson early in my career. I had understood the difference between price and valueâ€¦ in theory. When my favorite cut of beef is discounted 50% in the supermarketâ€”not because there’s anything wrong with it, but because the store is having a saleâ€”I don’t complain, I stock up. It was my friend Doug Casey who showed me how to look for and profit from differences between price and value in the resource sector.
An early example was when First Majestic Silverâ€”then a pure exploration playâ€”killed one of its three, high-profile projects with disappointing drill resultsâ€¦
I don’t have the details because I deleted all my past work for Casey Research (which was theirs by contract). But I remember that it was an old, high-grade silver mine in Mexico where First Majestic thought there was a lot more metal left in the ground. When they drilled in the logical place to look, they found old mine workings no one knew about. No silver, just empty space. The geological theory was correct, but some old timers got there first and left no documentation. Maybe it was Pancho Villa’s boys, working on the sly.
The important part of this story is that the company had three similar assets with potential for large deposits. One got shot down in flames. Objectively, one could say that whatever First Majestic had been worth, it was reduced by one-third by these results. But the stock sold off by something like two-thirds. The company had shown that it could pick good targetsâ€”it wasn’t its fault that records of past mining were incompleteâ€”and it had plenty of cash to go after the other two. It had become a bargain.
So I issued a strong “Buy” recommendation. If memory serves, shares were in the C$1.80 range. The stock later rose above C$20, making it better than a 10-bagger for me. The stock was already in the Casey portfolio at a lower price when I joined forces with Doug, so I’m not taking credit for that call. But the analysis and decision to put a new buy on the stock when it was oversold was mine.
A key part of this story is that First Majestic wasn’t just a bargain, but a very a compelling bargain. Lots of stocks go on saleâ€”usually for good reasons that don’t make me eager to buy. It’s not every day that I get a strong feeling that something is so ridiculously oversold that it has become a very compelling bargain. (Oddly enough, “ridiculously overbought” is far more common, but that’s another topic for another day.) While I don’t have stats to show it, my sense is that when I do get this feeling, it usually results in some of my biggest wins.
I’m telling you this because I have that feeling todayâ€”about certain uranium stocks.
I’ve already written that the stocks that fell off a cliff when investors overreacted to Trump’s delaying action on helping US uranium miners present speculators with a great opportunity.
Nothing has changed since then, but people are writing in to ask what’s wrong with uranium.
The upward trend since early 2018 remains intact.
But the stocks keep getting cheaper. Why? Sentiment.
I can feel the panic setting in among the less courageous stock market gamblers out there. Uranium itself may close the week down 50 cents or so. That wouldn’t change anything fundamental, but it would fan the flames of panic.
There’s a very real chance that we’ll see a much bigger meltdown of stocks in great companies that are already oversold in the weeks ahead, making them even more compelling bargains.
I would notâ€”and am notâ€”selling anything now, however. I might be able to buy in at lower prices ahead, but that’s no sure thing. Uranium prices could pop any day, as companies that put off signing new contracts while Trump deliberated step up to the plate.
I don’t pretend to know the future. If you’ve been reading my work for any length of time, you know how I feel about the prediction racket so many financial pundits are involved in.
What I do know is that when something is ridiculously undervaluedâ€”especially if it’s for the wrong reason, as with these uranium stocks todayâ€”the odds favor share prices rising toward value.
This is what experiences such as my call on First Majestic 15 years ago have taught me.
And that’s why I’ve already doubled down on my favorite uranium pick today.
What if I’m wrong?
Well, about 30% of my personal portfolio is in these uranium stocks. (I’d never suggest that anyone speculate on something I’m not willing to risk myself.) If I’m wrong, I will lose a lot of money. My track record will take a big hit. This is very important to me. I don’t take it lightly.
But I’m not worried. That’s in some part because I don’t speculate with money I can’t afford to lose.
The bigger reason is that I do have that feelingâ€¦ I think these uranium stocks will deliver in spadesâ€”and right now, you can buy them even cheaper than I did.
Which stocks? Well, that’s what subscribers to The Independent Speculator pay me to know.
But I’ve given you the idea for free. I hope you’ll remember that in the future.