Within the latest ISM non-manufacturing PMI report, the mining industry is sending traders and investors a clear 'qualitative' message that they would be wise to consider. "Declining commodity prices seem to have bottomed out." is the prevailing sentiment from the respondent section of the report.
This means that for you and anyone looking to find alpha in today's rocky market, the expectations for a rebound are beginning to make their way through the mining sector. Further, quarterly trends seen within the past PMI reports point to a bottoming in demand and inventories.
Higher interest rates are causing analysts to rethink valuations across industries in this current market environment. With that in mind, the mining stocks on this curated list combine the factors investors seek. Specifically, these companies combine positive analyst sentiment with above-average growth defined by double-digit upside potential.
When it comes to gold stocks, there are plenty of names to pick and choose from. However, today, the market's fairy godmother has decided to make the picking easier than ever.
In this case, support for the stock's relative upside is based on the fact that HL stock recently declined by as much as 42% from its high of $7.00 a share earlier this year. Compared to the S&P 500, Hecla has underperformed by roughly 43.8% year-to-date. By contrast, the SPDR S&P Metals & Mining ETF (NYSEARCA: XME) has behaved rather flattish during the same period. Still, by rising only 3.5%, it's blown past Hecla by 33 percent.
So, why would analysts stick their necks out and back a stock that has been underperforming left and right? You may get your answer by analyzing the company's latest financial developments.
Specifically, in its most recent quarter, Hecla reported the third largest silver mining production quarter in company history, alongside industry-leading margins in the segment. Suppose the analysts are correct in their belief that commodity prices are bottoming. In that case, the combination of new orders being placed alongside shrinking inventory means the macroeconomic conditions are favorable for a rally.
Now that Hecla has produced very cheap silver, an ensuing rally in the metal would also push the value of its current inventory higher, which is good for valuations. You can either pat analysts on the back for being right about this or join in the cheerful celebration of double-digit returns.
Wheaton Precious Metals
Pushed into bullish sentiment by similar forces, shares of Wheaton Precious Metals (NYSE: WPM) could be a sensible addition to this metals rally portfolio. Analysts are more modest - or risk averse - when placing their consensus targets for this one, though markets seem to think there's more upside on the table.
The consensus price target of $54.90 a share points investors to a 23% upside from today's prices. However, markets are subtly communicating that they believe this target should be higher.
The mining sector is valued at an average price-to-earnings ratio of 15.5x. In contrast, Wheaton stock trades at 32.2x P/E, a nearly 100% premium.
At first glance, this would make Wheaton a more expensive alternative to peers. However, as with any product or service, providers have the right to command higher prices than competitors as long as their delivery is superior. In the same way, the market's willingness to overpay for Wheaton could mean there is a higher perceived quality in the underlying earnings of the business.
With an annual jump in sales of 23.8% and a 2.5% gross margin expansion, Wheaton's business model is a prime example of just how much upside there is to come once these commodities find renewed upside momentum.
Falling in line is one of the most famous names in the industry. It is typically a go-to for investors seeking exposure to it. According to analyst price targets, shares of Royal Gold (NASDAQ: RGLD) are expected to jump by 22.6%, which would come as a welcomed contrast to recent 22% declines.
As the price of gold remains at a five-year high, demand and volume go out the window, so the company has rightfully decided to take things a bit slower during the past quarter.
If inflation continues to move closer to the Federal Reserve's preferred target of 2%, gold demand will probably rise as well. Expecting the company to utilize its recently increased liquidity to take advantage of gold pivots, markets are already placing a premium on Royal over the industry.
Recalling the average P/E of 15.5x for the peer group, investors can duplicate the market's preferential message when looking at Royal Stock's superior 26.2x multiple. Considering this stock has historically risen when the commodity cycle takes a turn, a recent double-digit decline opens it as a value-play primer.