Randall Abramson: Picking Undervalued Gold Equities Akin To Picking Strawberries by Streetwise Reports
Randall Abramson, CEO/portfolio manager with Toronto-based Trapeze Asset Management, says that picking stocks can be like picking strawberries. If a strawberry looks terrific, other than a tiny blemish, you simply remove it and enjoy the rest. But if the fruit turns out to be rotten, the entire strawberry is for the birds. Is the stock price below fair market value because there’s a little blemish and the market is overreacting? Or is it a sign that the stock is rotten to the core? In this interview with The Gold Report , Abramson offers a fist full of small- and large-cap gold equity names for investors that can look past the blemishes to see quality fruit.
Source: Brian Sylvester of The Gold Report
The Gold Report: A 10-year U.S. bond yields 2% currently. How is that changing the market?
The latest Robinhood Investors Conference is in the books, and some hedge funds made an appearance at the conference. In a panel on hedge funds moderated by Maverick Capital's Lee Ainslie, Ricky Sandler of Eminence Capital, Gaurav Kapadia of XN and Glen Kacher of Light Street discussed their own hedge funds and various aspects of Read More
Randall Abramson: We typically view the markets and our investment process through top-down and bottom-up lenses. Our top-down tools are telling us that all systems are “go,” and that there are no immediate hurdles ahead. This low-growth environment has allowed the broader markets to remain in a bull phase for longer than is typical. In fact, we’ve not had even a market correction of 10% or so for way longer than normal.
TGR: The World Gold Council (WGC) reports that central banks bought 477.2 tons of gold in 2014, which was nearly a 50-year high. What do you make of central banks buying gold at peak Cold War-era levels?
Randall Abramson: Gold does not have a built-in return. When interest rates are higher, everybody is less apt to hold gold because there’s too much of an opportunity cost. When interest rates are negative, as they are in some countries today, you’d probably rather own gold than lose money on bonds.
Central banks are perhaps trying to spur inflation by buying gold, or they could be less interested at these elevated U.S. dollar prices to hold dollars in their reserves, or they could be concerned about the U.S.’s balance sheet. All of those are factors. But the key driver is that there are places like China, which is flush with cash and willing to hold more gold. China always takes a long-term approach to the way it manages things. It may even be making a run at the U.S. dollar for reserve currency status and holding more gold in its coffers will help.
TGR: The WGC report also said gold demand jumped 6% in Q4/14 to 987.5 tons but was down 4% year-over-year. Does that bolster your spirits as a gold investor?
Randall Abramson: The 2014 growth rates were a bit deceiving because the 2013 numbers were out of sight, driven by huge investment demand in both India and China. And at the same time, India put curbs in place to limit gold buying, which probably slowed down demand growth for gold last year. In the overall picture gold demand has been growing nicely over time, while the supply has more or less flatlined. Now that the price of gold is around $1,200/ounce ($1,200/oz) and close to the all-in sustaining cost of production, our take is that about half of the global gold producers would not make a profit below $1,150/oz. That should support the price at that level. And given that the marginal cost of production for gold is around $1,400/oz, we believe that we will see $1,300–1,400/oz gold in the not-so-distant future.
TGR: Pick one: long gold or short gold?
Randall Abramson: Long. The world’s central banks are, in aggregate, accommodative, some of them highly accommodative, in terms of quantitative easing. We think that they will ultimately win the day, and this disinflationary period that we’ve lived through for years will transition into a reflationary period. The key indicator of that so far is that the gold price, while it’s near a recent low in U.S. dollars, looks terrific on the charts in just about every other currency.
TGR: Trapeze positions itself as value investors, stock pickers. Are we in a stock picker’s market for gold equities?
Randall Abramson: That’s a great question. You can go through periods where the overall sector is a better bet than finding a specific stock, especially from a risk-reward perspective. For instance, when the market bottomed in 2009, using a net to capture a bunch of stocks might have been better than a mere handful of particular stocks because the whole market was trading near $0.50 on the dollar. You didn’t want to miss out on the market reverting to fair value.
The gold equities market is in a similar phase. You would have been better off as a stock picker over the last couple of years to avoid highly levered or high-cost producers. Those companies witnessed unprecedented declines in their stock prices. But now that we’re sitting with gold stocks versus bullion at the lowest level in 75 years and the price:book value (P:BV) of the overall senior golds in the sector trading at about one times P:BV, it seems to be a period where casting a wide net may make more sense. And that’s an interesting comment coming from a bottom-up value investor like me.
See full PDF below.