What’s in Your Stocking?

What’s in Your Stocking?

By Rusty McDougal

The task at hand is to project two outstanding stock picks for 2009. I like that a lot! IDE readers often ask for specific stocks but we editors are constrained from doing so. We can end up looking like big teases at times.

Not this week! Let’s get started.

My publication is called Resource Windfall Speculator. The primary focus is small cap resource stocks and there are 26 stocks currently in the portfolio. Gold, silver, uranium, oil and natural gas as well as some base metals are included. The current emphasis is on the gold sector. Gold thrives on monetary chaos and we’re in the midst of a monetary and financial mess never before witnessed on US soil. Next Saturday’s editorial will delve into how long it will take to get through this disaster (hint: the title will be “Half Way to Hell”).

How have we done in small resource stocks the last year or so? Take a look at the following chart and you’ll get a taste of what we’ve been through:

There are no goodies or yummies in that stocking.

Small resource stocks are notoriously volatile. They can make you a fortune when they appreciate and they can cripple you when they go down. We’re limping badly right now. The entire sector has been trashed on an historic level. Company fundamentals have mattered little as good and great companies have been sold off with the weaker companies.

The companies that survive this painful shake out, stand to be outstanding performers in the coming months and years. Yes, the sector can decline by 65 to 70% on the whole. On the other hand, I’ve had numerous stocks that have multiplied in price many times over. Doubles are common when companies perform or the resource market is in favor. So are trades that net out 5X, 10X or more. I have had one trade that brought in profits at a 100 to one ratio.

These stocks are rank speculation. The risk to reward ratio is quite high. Buying when few others are brave enough to do so can prove very lucrative.

That being said, my two stock selections today will be amongst the more established junior resource companies. Your downside needs to be protected as much as possible.

If you read my regular columns you know I am convinced we are in a long term gold bull market. Present events could scarcely be more precious metal friendly. Gold is under official containment and has been for over 40 years. It relentlessly climbs higher in spite of all of these efforts. This was apparent at $250 gold and it is even more apparent now.

Make sure you own physical gold and silver in your personal possession. That door may be closing in the present environment.

Gold is set to start multiplying in the coming months and years. When it does these historically oversold stocks are going to be moon shots. There is much unappreciated value present.

The first stock for you is a Canadian company named International Royalty Corp (ROY:AMEX) (IRC:TSX).

International Royalty is significantly larger than most of the stocks within the portfolio. The fact that this one has earned a US listing on the AMEX speaks volumes to that fact.

ROY is a financial royalty company. They lend money in exchange for shares and profit splits once production has started. They are not exploring, developing or producing any resources themselves. The company holds 85 separate royalties on a multitude of natural resources. The most lucrative one is the Voisey’s Bay nickel project in Canada where ROY receives 2.7% of the smelted product. Others are set to come on line in the coming months and years. They are well represented by gold projects and will respond to a rising gold market.

These guys are deal makers! They have capital and they have world class expertise. They will be able to make unimaginably lucrative deals in the present cash starved resource sector.

This is the type of resource stock I would put my Mother-in-Law in (I like her). When, not if, heavy interest returns to the resource sector stocks like ROY will be the first recipients of big money. Buying a stock like this near annual lows is as good a speculation as you’ll ever find.

My second stock pick is on the other end of the spectrum from International Royalty. Riverside Resources (RRI:Toronto) (RVSDF:US) is a fairly new company with a tiny market cap near $3 million. Here’s a recent chart shown in Canadian dollars:

Riverside’s share price has been decimated in the recent global sell off. This is not an unusual chart for this sector. Please understand nothing fundamentally has changed with the company. They aren’t going away.

Riverside is an explorer and developer for gold and other minerals in Mexico, the US and Canada. Riverside owns a proprietary database that allows them to uncover very early stage exploration projects. Please look at the company website for further details (http://www.rivres.com/i/pdf/RS-onepager.pdf).

Riverside has exceptional management with deep pockets backing them. They will be one of the survivors of the present carnage. The business model is that of a project generator. They simply find the projects and do the early stage inexpensive exploration. Bigger companies with more capital are then brought in for the more expensive drilling and development. It is an excellent business model and makes Riverside a long term player in this arena.

If Riverside discovers an economic deposit they will trade at a multiple of their annual high of $1.45 Canadian. This is the risk to reward ratio of the sector I invest in on a daily basis.

These companies should be bought carefully, especially Riverside. You’ll get creamed if you put in a market order to buy Riverside. It doesn’t trade a lot of shares on a daily basis. Use limit orders. I typically request the “bid-ask” from the broker. For example, say the bid-ask was $.17 to $.20. The highest present bidder is $.17 so I might put in an order for $.18 if I really wanted the company.

A number of buyers could run this stock up ten cents next Monday if they were not careful. It’s better to be patient and disciplined. The stocks tend to come back to you in price.

I once won a stock picking contest simply by looking at the newspaper to see which one was down the most on a given day. Three months later...voila! ... that stock was the one that appreciated the most. Picking high quality companies being sold off mindlessly is an even better strategy. These are two very high quality companies. They also give you a taste of what Resource Windfall Speculator is all about.

May your stocking be filled with delectables. If you get coal in it… may it be high grade and economical!

Invest Resourcefully,

Rusty

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The Best Corner of the Market— It Will Be Where You Probably Aren’t Now

By Lynn Carpenter

Rick Pendergraft’s got it right. If you didn’t read what he said on Monday about your high odds of making 42% in the next six months, read it now. "If History Repeats Itself, You Will Want To Be In The Market For The Next Six Months". I totally agree with Rick’s direction and spirit because I’ve seen the same history. I might trim the expectation a bit, that’s all.

You ought to be in stocks now to catch the wave. And even if you don’t know exactly when the rebound will start, remember that it was the active investors who made 84% during the Great Depression, not the people who quit. "Can You Really Dare to Buy Low?... Most Can't, Everyone Should".

But make big returns in what? If the market is going to rebound, do you invest in the whole market, index funds, small caps, dividend stocks, what? There are complications this time around that mean some bargains won’t be bargains after all.

As it happens, I did some research on the subject recently. It was the lead idea in last month’s Rising Tide, and the stock pick got off to a fast 18% in its first two weeks.

In fact, the pick of the month before was also this kind of stock, and it did even better. And Rising Tide stocks got battered this past year just like everyone else. But stocks of this type are already doing better than the market since mid-November.

We can’t guarantee you a recovery market will take off with a rocket’s red glare on January 1, though I think we are in the earliest stage, already on the platform. History does strongly favor it. And, as I’ve learned, certain approaches are especially likely to do well in the beginning of a recovery market.

A “recovery market” is my own term to take in the rise off the bottom of the previous bull market until the point where the last, old high is met and you can truly celebrate a new bull market. This timing offers a clue. What does best in a recovery market is the opposite of what did best right before it—it’s the stocks that got thrown overboard long ago.

Here’s the cycle: When the market is falling and people decide it’s really a bear market, not just a normal blip, they flee to safety. At that point, standard value stocks and large caps tend to do well. Most writers will tell you it’s “defensive stocks.” I think it’s more the case that defensive stocks belong to the value and old-reliable-blue-chip categories that people find reassuring.

That’s a generality that fits all bear markets. In each of them, one or two other sectors may also do particularly well. For instance, this time water and biotechs did much better than most other groups.

In the depths of a bear market, this shifts again. When nearly everyone is discouraged, safety means cash. Either investors trade shares for cash investments like T-bills or they expect cash from their stocks in the way of dividends.

Then comes the recovery market, which begins quietly. And what excels then is a new, broad category, a different focus—growth stocks.

Good Credit Cures A Bad Economy

By Andrew Carpenter

Quote of the week: Every tree and plant in the meadow seemed to be dancing, those which average eyes would see as fixed and still. – Jalāl ad-Dīn Muhammad Rūmi

Here are four thoughts to trip over as we round yet another sharp corner on the path to economic recovery.

1) The perfect world arrived last summer.

Deregulated US banking, housing and financial sectors led to a world of no credit.

This is the era for which a vocal financial publishing crowd has been begging. No regulations. No credit. No borrowing. No more extra debt.

So, how are you enjoying their world… is it the paradise as outlined in the millions of pages in books penned by our betters who sniffed because hoi pathetic polloi lived on credit?

Of course, you know we’re about to wreck this beautiful Eden with a big bite out of the borrowing apple.

Me, I can’t wait to realize Eve is naked.

And, I sure wish the publisher John Wiley and Sons was publicly traded, because its presses are going to be cranking overtime.

2) As you’ll see, we don’t have this problem here at IDE, but here’s a huge economic truth, one that’s created a lot of hypocrisy lately.

If you buy a corporate bond, you are a creditor. You have lent a company your money – commercial paper, secured debt, unsecured debt, senior debt and subordinated debt – you hope you’ll be repaid at a tasty profit.

That’s different from when you buy a stock – a share. In that case you buy a share of the company.

A bond must be repaid, usually at an agreed upon amount.

If the company goes bankrupt – defaults on its repayment to you – you get in line, somewhere near the back, and hope to get some of your money back, while most shareholders are S.O.O.L.

This is the world of credit.

What the hell is wrong with that?

Even better, today, we’re told that corporate bonds are one of the world’s safest investments. Here at IDE, Steve McDonald has, what I am told, a great bond trading program.

You should check it out because to heck with Polonius, I want to be the lender… as long as the return is high.

But, while hypocrisies are delicious, you need to be aware that if you buy bonds you will need to cut the crap when it comes to credit and borrowing rhetoric.

You buy a corporate bond… you tout corporate bonds… then you can’t strut around and complain about a credit-wrecked US economy.

That’s more than okay with me. I’d rather hear you talk about your fat profits than listen to complaints about that which is out of your control.