What are we looking for?
Gold has been on a bullish run for the month of October. Since Sept. 30, the Comex gold contract has increased by 6.5 per cent to $1,187.50 (U.S.) a troy ounce. Gold has been aided by a weaker U.S. dollar and expectations that the U.S. Federal Reserve is unlikely to increase interest rates this year. In addition, gold and other precious metals are seasonally strong in the later part of the year as jewellery makers prepare for Christmas and Diwali – two major gold-purchasing holidays. All of this is bullish for gold and precious metal stocks.
The screen
We will be using Recognia Strategy Builder to search for Canadian precious metal stocks with reasonable valuations and strong operating margins.
We begin by setting a minimum market capitalization threshold of $1-billion (Canadian) to focus on larger, more established companies in the sector.
Next, we will look for companies that are profitable and have an operating margin of 10 per cent or more. Operating margin is a measure of how much profit a company makes on each dollar of revenue. To ensure we don't overpay for our investments, we will also set a limit on the company's forward price-to-earnings ratio (P/E) of 30 or less.
Finally, in order to focus on stocks that are showing upward price momentum, we will select stocks with positive price performance over the past four weeks.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Barrick Gold Corp. is the largest company on our list with a market cap in excess of $11-billion. With operations in Canada, the United States, Australia, Argentina and other countries, Barrick is the world's largest gold miner with more than seven million ounces of yearly gold production. The company has a strong operating margin and its stock price is up 19.6 per cent in the past four weeks. In spite of this, Barrick still appears to be reasonably valued compared with its peers with a forward P/E ratio of just 17.1.
As the name suggests, Silver Wheaton Corp. is a pure play silver company that acquires silver produced by other companies as a byproduct of their main operations. This operating model gives Silver Wheaton very low costs as demonstrated by its operating margin of more than 39 per cent, the highest on our list. Silver Wheaton's stock price has surged by slightly more than 17 per cent in the past month.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.