With renewed investment interest in gold globally, you may want to consider indirect exposure to the upside by investing in Newmont
So let’s look into detail why we believe there is still time for investors to gain from Newmont’s rise. There are two parts to this.
First, the market has recognized mis-pricing, triggered by renewed global interest in gold, and there is momentum in the stock right now. Why do we say Newmont was mis-priced? Simply because despite growing its revenue consistently (nearly +44% between 2016 and 2019), and significantly improving its operating margins (from -0.24% in 2016 to 36.75% in 2019), Newmont’s EV/EBITDA multiple of 6.9 (at the beginning of 2020) was lower than the industry average as well as its peers. As an example, its competitor Freeport-McMoRan
Now you might say that with a 55% increase in its stock price this year, this mis-pricing has already been corrected. That’s where you might be wrong! This is where our Second argument comes in. The demand for gold is increasing and prices have surged ~ 21% this year. But that’s just the beginning for many. Going long on gold is one of the most crowded trades right now. Jefferies expects a massive 180% increase in gold price from current levels, and many funds are bullish on gold. In India, which is one of the biggest gold markets, Amazon Pay
As far as mis-pricing is concerned, if we assume that EV/EBITDA could improve to the industry level ~ 9.5 by the end of the year, it could mean a full year stock increase of about 80%, suggesting additional room for stock price growth. How do we get 80%? It is a combination of nearly 35%-40% increase in multiple and assumed 30% increase in EBITDA. Consensus estimates suggest close to 18%-20% revenue growth for Newmont this year, accompanied by a profuse 75% EPS increase. And frankly, the way global demand is shaping up, Newmont deserves better than an average multiple!
Considering the above, we think that Newmont could still be a good investment.
So, Newmont might give good returns even from current levels. But, what if you’re looking for a more balanced portfolio instead? Here’s a top quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.
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