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Gold stocks strong due to price of bullion hitting all time peaks

Here’s what I wrote about Barrick in last week’s edition of Cabot Top Ten: The price of gold is in a solid uptrend, and that’s helping all gold stocks, including Barrick Gold. The company, based in Canada, is one of the largest gold producers in the world...most gold stocks simply trade up and down with the price of gold, and for good reason—cash costs for mining activities are holding relatively steady, so as spot and futures prices increase, the extra money will fall to the firm’s bottom line.

“I’m Mike Cintolo, and I Approve This Message”

As you might tell from the title of this CWA, I’m no political junkie ... but I do enjoy election season. There’s something about thousands of individuals getting up in the morning, voting, and having a say in the direction our country will go. I even like tuning into the major networks on the night of a primary, watching how the vote tallies pile up--it’s like watching a long, drawn out horse race based on the battle for people’s hearts and minds.

What I don’t like, however, is listening to all the pundits, and even some of the newscasters. It seems like everyone has an agenda, Fox leans right, while CNN leans left. And, of course, the various pundits hired to appear on TV during election season all have their favorite candidates and positions; sometimes it’s hard to learn anything from any of them, and when you do, you wonder whether you’ve just been taken for a ride.

And that says nothing about the candidates themselves! I’m purposely keeping any easily throwable objects away from my couch, because if I hear the words “change” or “unity” one more time from a politician, something is likely to fly through the family room.

Doing Nothing is Difficult

It’s a similar story on Wall Street, especially when the trends of the market are down (as they are today). The Wall Street gurus, of course, abhor bear markets (or corrections or bear phases ... call them whatever you want); their firms all make much more money during bull markets. The result? You’ll be hard pressed to find anyone on TV with coherent, reasonable advice about what to do during difficult times. Instead of “change” and “unity,” these pundits spout words like “value,” “bargains,” “overdone,” and “buying opportunity.”

All this is a longwinded way of saying that you’re not going to get any help from Wall Street during market downturns--if you’re counting on CNBC or some analyst online to give you prudent advice, good luck to you. Of course, everyone in this business works in glass houses; I’m far from perfect, and I’ll admit it to anyone who asks. But I also take pride in telling subscribers exactly how it is. The fact is, sometimes, the market heads south, and your best move at such times is to sit back, relax, and do nothing (or, at least, very little).

The ironic thing is that, doing nothing is difficult! If you were a salesman, and someone told you to stop selling your wares for the next month, you probably wouldn’t know what to do with yourself. It’s equally hard for an investor to sit on his hands--he feels like he should buy stocks. That’s how you make money, right? In the long run, yes ... but at times, you also make money by not losing it--by doing nothing. It’s simple logic, but if you listen to the Wall Street poo-bahs, you’ll hear nothing of the kind.

Besides turning off the tube, another thing to work on during down market periods is what we call “Freeing Yourself From Why.” Let me explain.

The Why

We’re always answering emails and phone calls from subscribers, most of the questions being about one of our recommended stocks. A common question these days: “Why is XYZ stock falling? Is there anything fundamentally wrong with the company? Has there been any news?”

In other words, people want to know why such-and-such is happening. Why do they want to know why? Because it makes them feel like they understand what’s going on, helping them feel on top of the situation. It takes away uncertainty, which, for most of us, is an uncomfortable sense; when you don’t know why your stock (in which you have invested real, hard-earned money) is falling like a rock, you feel more like an observer (hoping your team hits the homerun) instead of a participant.

Ironically, however, the best investors in the world generally free themselves from the question of why a stock or the market is going up or down. In other words, these top investors believe what they see, as opposed to trying to understand what is often unknowable, and then putting their faith in that supposed understanding.

See the difference? I know that sounds a bit professor-ish, but it’s true - the best growth-stock investors believe what the market is actually telling them. If a stock is falling on triple its normal volume, breaking down through support, they sell ... and then they look for reasons afterward.

When answering subscribers’ question, we usually answer with something like this: “Well, there’s no news from the stock or any firm in its sector. But it appears as if the market, which has been trending lower, is finally taking down some of the leaders with it. And this stock was among the leaders.” It’s better to approach these things from a student-of-the-market perspective - understanding the how the market really works, regardless of why it works that way.

Thus, back to the start of this section, I suggest you start believing what you see, instead of arguing with or ignoring the action of the market. If you stop trying to understand WHY something is happening, you can spend more time simply observing WHAT is actually happening, which is sure to make you a better investor.

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Everything’s Going Green

Alternative energy technologies are attracting a flood of money...

Solar power companies, for example, are seeing triple-digit revenue growth... Wind-power farms large and small are going up all over the globe, converting free wind into electricity... and Ethanol has taken America’s heartland by storm, fueled by government support of the industry and consumers hungry to reduce our dependency on foreign oil.

In every one of these sectors - and more - there are companies large and small working round the clock to satisfy the booming demand for an alternative to high-priced oil. Early investors are getting rich. For example, in 2007 First Solar (FSLR) gained over 800%, SunPower Corp (SPWR) gained over 350% , & J A Solar (JASO) gained over 300%.

And this is just the beginning, because these solar power companies are enjoying triple-digit revenue growth. They’re seeing their costs of production fall thanks to increasing economies of scale. And they’ve got profit margins that make some software manufacturers envious!

Long-term, we’re extremely optimistic about this broad earth-friendly sector. A decade ago we saw a great bull market in Internet stocks as money flooded in. More recently, we’ve seen Chinese stocks go through the roof, again the result of a lot of money chasing a small number of stocks. And we think we’ll see exactly the same phenomenon in “green” investments.

Bottom line: Cabot Green Investor will be your #1 Guide to Earth-Friendly Profits, enriching both the earth and your own portfolio. The inaugural issue of this brand new publication, was published January 3.

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OK, enough with my rant on psychological market stuff. If I believe what I see, where does that lead me? To gold stocks, which, I must say, I have rarely owned throughout the years--as a true-blue growth stock investor, owning a company with poor sales and earnings growth is akin to a Red Sox fan rooting for the Yankees.

But the fact is, gold stocks are very strong, due to the price of bullion hitting new all-time peaks (finally eclipsing its climactic early ‘80s run-up). A group move is well enough, but what impresses me is the tremendous volume flowing into these stocks. Barrick Gold (ABX), in particular, exploded higher two weeks ago on its heaviest weekly volume ever! And it continued its march higher last week, despite a down market.

Here’s what I wrote about Barrick in last week’s edition of Cabot Top Ten:

“The price of gold is in a solid uptrend, and that’s helping all gold stocks, including Barrick Gold. The company, based in Canada, is one of the largest gold producers in the world, with projects in Nevada, Chile, Tanzania, Alaska, South Africa, Russia and Pakistan, to name a few. While the fundamental numbers in the table below don’t get the heart racing, most gold stocks simply trade up and down with the price of gold, and for good reason - cash costs for mining activities are holding relatively steady, so as spot and futures prices increase, the extra money will fall to the firm’s bottom line. Adding to Barrick’s appeal is its size (institutions want to own big, liquid names in this industry, not small speculative outfits) and a strong management team, which has a history of sound acquisitions and cost containment. All told, we believe Barrick has a bright future as gold heads toward $1000 an ounce.”

The stock, as I wrote, is powerful, and I don’t expect much of a pullback ... although a pause is certainly possible given all the news coverage of rising gold prices. I think you could buy a little here, or on any pullback.

All the best,

Mike Cintolo

Editor’s Note: Mike Cintolo is Vice President of Investments for Cabot Heritage Corporation, and also serves as the editor of Cabot Market Letter. While the topsy-turvy market environment has most investors wondering what to do, the Cabot Market Letter’s time-tested market timing indicators have guided the Letter’s Model Portfolio to superb gains - it was the #6 newsletter in the country during 2007, with a gain north of 35%, vs. less than 4% for the S&P 500; over the past five years, the gain has averaged more than 18% annually. Mike’s specialty is finding young firms with revolutionary new products that are under-owned by the big mutual funds. If you want to stay in gear with the market, and uncover 2008’s big winners, consider a no-risk trial subscription to the Cabot Market Letter a try.

A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.