Stocks represent an interest in a company and are not immune to bleak economic conditions and/or souring company prospects. Hence, gold is used as a hedge against the very conditions that drive stock prices down. In reality, this relationship is not as clear cut as some might think, but it does help to explain why not all gold stocks have sprouted wings in the past few days and weeks.
For example, many purchase gold when inflation fears loom, yet there is little-to-no correlation between the two. Prior to President Nixon ending the United States gold standard in 1971, the U.S. government often set and maintained unrealistic gold prices on the precious metal, thereby creating a disconnect between gold and the currency it backed.
Not much changed once gold was allowed to be bought and sold on the open market. When inflation averaged a 17-year high (3.9%) in 2008, the price of gold crept forward by 4% -- a far cry from the 31% advance the year before or the 25% increase the year after (during a time of deflation, no less).
There are three things you need to focus on when shopping for gold and mining stocks :
1. Look for high profit margins (in excess of 25%). All the companies I studied that showed this trait have done very well over the past several years, whereas the laggards have struggled.
2. Focus on companies with a market capitalization of at least $1 billion and more than 10 (unrelated) employees.
3. Prefer companies that pay a dividend (the amount doesn't matter). Again, this typically indicates an older, more stable company with the wherewithal to adapt to changing market conditions.
Using these criteria, it should be clear why some small companies should be avoided if you want to profit in the gold game. Sometimes going with the tried and true makes a lot of sense, however your certainly not going to get rich investing in something that’s in everyone’s portfolio. For the more experienced, sophisticated and (hopefully) risk-aware investors, see up and coming companies like Pershing Gold Corp. (PGLC), Valor Gold Corp., (VGLD) and Continental Resources Group, Inc. (CRGC).
My thoughts on Passport Potash, Inc. (PPRTF) and related agricultural investments.
Because potash is so effective at adding potassium to the soil, which directly increases crop yields, farmers consider use of potash fertilizer to be essential. As a result, the price of potash is supported by a lot of demand from farmers around the world.
Since the production of potash is limited to a relatively small number of companies, there is a substantial amount of revenue being earned by potash producers. This has been a great investment opportunity and should continue into the future. Increasing crop yield is of value to farmers and the best way to do so is to apply potash to crop lands.
Potash prices range from $400-550 per ton as of early 2011. Prices are forecast to average $500 throughout the year. This makes potash a valuable product for producers, many of which have substantial potash deposits. Economical production is key to profitability, however. Many stock analysts have released notices to clients advising them to investigate potash producers.
All investments in resources must be considered part of the investor's risk portfolio. To illustrate the volatility of junior potash company stock prices, market forces pushed most all of the entities down 15-20% or more during March and April of 2011. Those willing to step invest in turbulent issues should be careful but expectant of potential future gains.
Potash is now recognized as being a vital requirement for agricultural production. It is one of the key fertilizers that can be used to greatly increase crop yields. In areas where extensive agriculture has been used, potash can restore potassium depleted soils. The price of the material has risen greatly over the years.
With the economic slowdown in 2008, potash prices dropped but have risen steadily since. As the compound is a major factor in crop yield and is not a byproduct of petroleum production, potash price should continue to be significant. Thus holding stocks like Passport Potash, Inc. (PPRTF) might prove a wise investment decision and part of a well-diversified stock portfolio.
In light of recent discussions surrounding pharmaceutical industry M&A, including but not limited to German pharmaceutical company Bayer's recent acquisition of nutritional supplement company Schiff Nutrition International for $1.2 billion, I think it entirely fair to examine the buyout potential for other nutritional supplement companies such as ChromaDex Corporation (CDXC).
In so doing, here are just a few things to consider when trying to access the investment potential of small and seemingly hard to predict companies such as CDXC.
1) The nature of biotech stock is such that prices tend to rise and fall following news of rercent drug trials and regulatory approvals.
2) Many such companies have no growth or products to speak of but rather drugs in the pipeline that could become blockbusters.
3) Small-cap pharma is a very difficult area to chase momentum in. The broader healthcare sector tends to really outperform only in highly volatile periods for equities overall, and the industry seems to be much more vulnerable to company-specific risk than many others.
4) Big pharmas are losing patent protection on their top-producing drugs and are in a mad scramble to secure patents from smaller companies to generate revenue down the road.
Regarding Muscle Pharm Corporation's (MSLP) apparent desire to do a 650 to 1 R/S, one should keep in mind that reverse splits are usually a sign of good things for companies on the way up.
Using a reverse split to raise the share price and obtain an uplisting is a very positive sign for a company and is much different than companies that use a reverse split to prevent being delisted. Once again, the confusion relates to delisting as opposed to uplisting.
Many people who don't focus on uplistings only encounter reverse splits in the context of companies that are trying to stave off a delisting, so in many people's eyes a reverse split is a sign of a troubled company.
For the relative few of us focused on uplistings, a reverse split is typically the first catalyst that attracts attention to the potential uplisting and is considered a very good indicator.
Cynics will argue that I'm only highlighting the exceptions to the rule, and that's fair. They aren't the only companies to beat the market since declaring stock splits, but there are far more losers than winners after going for reverse split makeovers.
A company declares a reverse because its share price is unacceptably low -- and that doesn't happen by accident. There are plenty of companies declaring desperate reverse splits on the way to zero.
However, that was going to happen with or without the exchange adjustments.