Prepare for Tough Year Ahead and Stay the Course,
Says Sprott's Adam Footer
Commodities and resource equities have disappointed many investors over the past 18 months. The Gold Miners ETF (GDX) is down 30 per cent over the past 12 months. The Dow Jones Commodity Index (DJC) is down 8 per cent from a year ago.
I asked Adam Footer, an investment broker at Sprott Global Resource Investments, Ltd., what he expected next for natural resource equities. Will they go much lower? How should investors prepare?
"Build a solid portfolio around a very small group of core stocks, prepare mentally, and stay the course," says Adam. "It may be long, boring, and painful to sit through, but I think that the end result will reward those who wait."
According to Adam, many natural resource companies are facing a reckoning for all the excesses of the bull market days. He believes that as stock prices continue lower and stagnate, investors will become even more discouraged. They will increasingly look for something with more near-term potential, he says, indiscriminately dumping companies with a longer reward horizon.
Investor sentiment is extremely important to the valuations of junior natural resource companies, according to Adam. Most of these companies do not pay dividends, so investors are buying into potential for gains in the future. Now, after suffering through poor returns on many of these companies, investors are very discouraged.
In the bull market that lasted through 2010, high investor confidence made it easy for companies to raise money through issuing new shares, boosting natural resource stocks across the board, says Adam. Now, a lot of those companies are struggling to keep the lights on. Too much money came into the sector chasing mediocre projects, he says, and that bubble burst. According to him, the good are being dragged down with the bad.
"It's going to be a stock picker's market," says Adam, "the sector isn't going up, but some individual stocks will."
There is an opportunity now to build a portfolio of companies that are underpriced because of the generally negative sentiment about the natural resource markets, he adds.
"Select exploration companies have made significant progress in the last two years, spending money wisely, and advancing projects, yet their share prices show no reflection of this."
Even these underpriced companies could remain low, or even go lower, before they turn around, he warns. Investors should prepare psychologically for tough times ahead: "Just because a stock is cheap doesn't mean it will go up. Cheap can stay cheap for a very long time."
Until next time.
Henry
Wer die Aktien nicht hat, wenn sie fallen, der hat sie auch nicht, wenn sie steigen. AK
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