Gold Mining Stocks

Mining for Top Gold and Silver Stocks

On April 1st, I wrote an article for TheStreet.com titled "Fool’s Gold," where I reiterated a favorite argument and trade idea from the past year about taking short positions, or selling calls, on the Market Vectors Gold Miners ETF ( GDX ) as its momentum slowed vs. gold itself.

My rationale was that GDX would not track the performance of SPDR Gold Trust Shares ( GLD ) because many of the big miners which comprised it were underwater from past gold hedging sales at much lower prices and thus not reaping all the benefits of the yellow metal above $1,400.

Since then, GDX has underperformed GLD by over 18%, with GLD rising roughly from $139 to $149 (+7%) and GDX dropping from $60 to $53 (-11.6%). What, or who, drove the miner basket to underperform as its precious surged to new all-time highs above $1,500 this quarter?

Primarily, the three amigos at the top, that's who. Barrick Gold ( ABX Analyst Report ) comprise 35% of the ETF's assets. Does that mean there are no good mining stocks worth your investment dollars?

Not if you know how to use the Zacks Rank to sift the good stuff from the fool's gold. The three amigos mentioned all carry a Zacks #3 Rank (hold) and have done so for many months. This means that there was nothing meaningful in their earnings visibility that caused analysts to get excited about their prospects even as gold surged.

Seeking a Gold Miner Worth Its Weight

In the Zacks Industry Rank, gold miners take the 178th slot with 32 companies currently. This puts the gold miners, as a group and based on their earnings estimate revisions, just into the bottom third of over 260 industries. Not good company to be in, since we try to avoid positions in these areas.

Of the 32 companies, none possess a #1 Rank (strong buy). And only two earn a #2 Rank (buy), Gold Fields Limited-ADR ( GFI Snapshot Report ) and Midway Gold ( MDW ). Gold Fields Limited is one of the world's largest unhedged gold producers with operating mines in South Africa, Ghana, and Australia. The $11.85 billion company is expected to earn $1.32 this year and $1.76 in 2012, which would represent 59% and 33% year-over-year EPS growth respectively.

From the looks of things today, finding a good gold stock to trade is no easy task. The clear task then is to keep an eye on the Zacks Rank changes and look for miners that get bumped up to a #1 or #2 position.

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