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