This year’s rebound in the gold market has an authentic feel, in my view. The gold downturn started much earlier than the slump in the oil and the general mining downturn.
Until a few months ago, gold mining stocks had been out of favour for some time. That situation now seems to be changing.
Gold miners that worked hard to cut costs during the downturn are now starting to reap rewards. While I’ve been writing this article, gold touched $1,300 per ounce. That’s a 22% rise so far this year.
While I’m not sure how long gold’s momentum will last, the evidence suggests that gold has now bottomed out and entered a new upcycle.
Gold miners rebounding
Shares in many gold miners have already risen by 50-100% this year. This week’s portfolio selection, Pan African Resources, is no exception. At the time of writing, these shares have risen by 92% so far this year. Yet unlike some of its peers, Pan African still looks good value.
The stock trades on a low forecast P/E with a generous yield. Pan African also benefits from a decent level of analyst coverage, which should help us to form a more meaningful opinion about the near-term outlook.
Pan African Resources’ StockRank of 98 means that it has risen to the top of the Stock in Focus portfolio screen this week, and will be the next addition to the SIF portfolio.
This could be a controversial choice and it’s certainly not without risk, as I’ll explain later. But now could be a good time to get back into the gold market, and I believe that Pan African could have the potential to deliver attractive returns for shareholders.
Deceptively good value?
A cyclical stock coming out of a deep downturn often looks expensive on a trailing P/E basis. According to Stockopedia, Pan African trades on a trailing twelve month P/E of 15.6 and on a 2015 historic P/E of 20.7.
I’m not too concerned by this, given the improving outlook. I’m also encouraged by Pan African’s other ValueRank metrics. The stock has a trailing dividend yield of 3.7% and an earnings yield of 9.3%.
The only real concern is that free cash flow was apparently negative last year. However, closer inspection suggests this is the result of an accounting quirk. Like
