Hats off to Barrick

I don’t believe in the health of the stock market at large. It has further to fall in my opinion. Nationally it seems we are being feed the idea that the worst is behind us in terms of this financial crisis, and that reassuring message seems to have gotten people back into the stock market. It’s a classic suckers rally that is only going to end badly for investors. Paradoxically, the modern investment mantra of “stocks for the long haul” and using diversity as a means of protection is just going to guarantee that the average investor will feel the full weight of this next leg downward. Gold, on the other hand, has a bright future.

I’ve made a great deal of money trading shares of Barrick Gold (ticker symbol ABX) over the past twelve months. It’s a company I follow quite closely. I feel its one of the few great investments available in the stock market as it allows for you to gain leveraged exposure to the rising gold price while at the same time holding a stock that is paying you dividends. While the oblivious investors of the world are foolishly plowing their money into stock market index funds without the slightest clue as to the fundamentals of their underlying investment, I believe, as Henry Ford did (and Warren Buffet does) that its perfectly alright to put all your eggs in one basket provided that you “watch that basket.” Barrick is my egg basket and I watch it quite closely.

Earlier in the year, I took apart their financial projections and put it into an Excel spreadsheet. My own estimate as to what the company would earn was around $1.65 a share for the year, and that’s the figure I kept in mind when I was trading Barrick. I figured that the eventual broad-based stock market downturn would not allow companies to enjoy huge premiums in their price-to-earnings ratio, so I was reluctant to hold Barrick at a PE ratio greater than 20. Using my figure of $1.65, that put the maximum price I was willing to pay for Barrick at $33. This outlook encouraged me to buy Barrick when it dipped below $30 and sell Barrick at anything over $35. That generous range is what the stock has been trading in all year, and it’s more than enough of a range to show a decent profit by simply buying low and selling high.

I now have to factor in some new information, however, because Barrick just released their 2nd Quarter results. Their production is ahead of schedule and they’ve been able to keep their costs down. it now looks like a reasonable estimate for their 2009 earnings is going to be closer to $2.12 a share. Factoring in a PE ratio of 20, that makes Barrick an excellent buy at anything under $40. Currently it’s at $35, and I’m looking to increase my exposure to it. I just don’t see that this company stock has any real downside at this price given it’s recent performance, the gold’s potential to rise as this crisis drags on.

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