CA - Buy The Plunge In Newmont: Get Gold Exposure And A Near 5% Yield

2024-01-21 20:09:11 ET

Summary

• The price of gold has been rising but recently has pulled back, creating a new buying opportunity for gold miners.
• Newmont shares have dropped from around $42 to just over $34 and now yield nearly 5%.
• Gold could perform well as interest rates drop and as investors look for safety from money printing.
• Newmont shares appear oversold and ripe for a short-term bounce and much higher prices in the long term.

Newmont Corporation ([[NEM]], [[NGT:CA]]) is a leading gold miner, and it operates in favorable mining jurisdictions which reduces potential risks for investors. It has operations in North America, Africa, Peru, Australia, and Latin America. Newmont is also known for its record of safety and for using sustainable practices. For many investors, this is the "go to" stock for gold exposure. This stock had a nice run from around the low $30 level in November and jumped (along with the price of gold) to just over $42 in December. However, it has plunged back to about $34 per share in January, which I believe is an ideal buying opportunity. With this in mind, let's take a closer look:

The Chart:

As the chart below shows, this stock surged in December but has since given back almost all of the gains. Newmont shares are now oversold and the stock plunge appears to be overdone because the price of gold has not dropped much from recent highs. The 50-day moving average is $38.64 and the 200-day moving average is $40.66 per share. If gold stabilizes at current levels of just above $2,000 per ounce, or if it goes up, I believe Newmont shares will soon rebound back to at least the 50-day moving average, which is good for a gain of just over 10%. Longer-term, I see significantly more upside.

Earnings Estimates And High Yield Dividend Suggest This Stock Is Undervalued:

Analysts expect Newmont to earn $2.37 per share in 2024, and $2.66 per share in 2025. This implies a price to earnings ratio of just over 14 times earnings estimates for 2024 and 13 times estimates for 2025. This is significantly below the current average for the S&P 500 Index (SPY), which is right around 23, at this time . Of course, earnings could rise (or fall) depending on the price of gold. If gold hits new highs in the coming years, we could see a significant expansion in the price to earnings multiple for Newmont. The dividend also appears to suggest this stock is undervalued because it is paying a yield of $1.60 per share which offers a yield of nearly 5%. By contrast, the yield on the S&P 500 Index is only about 1.5% . Analyst price targets also suggest this stock is undervalued. Morningstar just released a new and bullish report on Newmont, calling it "the cheapest gold miner we cover", and said it was 30% undervalued with a $54 price target.

The Balance Sheet And Other Factors:

Newmont has a very strong balance sheet with around $3.2 billion in cash and cash equivalents. It has about $6.2 billion in total liquidity and an investment grade-rated balance sheet. Another important factor is that it has an all-in sustaining cost of $1,400 per ounce of gold. This balance sheet strength and strong profit margins set this company up to reward shareholders with stock buybacks, and dividend increases while keeping potential risks low.

The Case For Gold To Go Higher:

There are many reasons why gold could be poised to head much higher. The Federal Reserve has raised interest rates significantly, and in spite of this, gold has held up relatively well and just recently went over $2,000 per ounce. Based on recent economic data, these rate increases appear to be starting a slowdown in the economy or even a recession. That could bring about rate cuts by the Fed which typically weakens the US Dollar and boosts assets like gold. The massive debt load of the United States Government and the huge debt levels seen around the world are another reason why gold is an attractive hedge against paper assets and freely printed fiat currencies. Geopolitical issues seem to be flaring up globally and that is also a factor that is supportive of higher gold prices. Many well-known analysts expect gold to hit $2,500 per ounce in the next year or two. Mark Newton with Fundstrat has an "intermediate target" of $2,500 for gold and a Business Insider article details his bullish outlook by stating :

"My technical target for gold is $2500/oz, and it looks appealing to be long precious metals given falling real rates, rising cycles and ongoing geopolitical conflict."

If you have been following Mark Newton and Tom Lee at Fundstrat, you know they have made many profitable and prescient forecasts. One of Seeking Alpha's most popular contributors, Avi Gilbert thinks gold is heading higher. As this recent article points out, he sees a gold rally in 2024, which could take it to $2,428 and possibly then on to $2,700 per ounce, it states :

"....it's entirely plausible that gold will go as high as the $2,700 region before the next multi-year correction begins."

Potential Downside Risks:

The biggest potential risk for any gold miner is, of course, the price of gold. If gold were to plunge in value, it would significantly impact the profit margins for Newmont. Another potential risk for most miners is that they often operate in less stable countries; however, this is not a major risk for Newmont shareholders. Management execution, weather, labor strikes, and geopolitics are other potential risk factors to consider. Not everyone is bullish on gold or Newmont. On January 10, 2024, analysts at TD Securities downgraded Newmont shares from buy to hold.

In Summary:

Newmont is a giant in the gold industry and it offers one of the lowest risk profiles in this sector due to the stable jurisdictions it operates in and the strong balance sheet it has. The recent plunge in the stock appears overdone because gold has not given back much of its recent gains, even as Newmont shares have done. The future looks bright for gold and Newmont because interest rates appear poised to drop in the next year or so and debt loads around the world are rising to levels that make many investors want to own hard assets like gold. In addition, the dividend yield is competitive with some of the best money market funds and CDs.

No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

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