Golden Auto Parts??
Let’s continue my review my top 10 holdings by looking at Royal Gold - RGLD. Anyone who gets all the way to the bottom also receives a few auto parts ideas, near their lows, to think about.
Before diving into gold I need to report on my field trip to find Krispy Kreme - DNUT - donuts. Their website guided me to a Publix grocery store about 10 miles away. After cautiously navigating 12 traffic circles filled with semi-alert senior citizens, I arrived. The donuts were all the way in the back, in front of the milk. I guess that is a prime spot, but who drinks milk anymore?. You had to buy a package of donuts. I got a package of 6 for $9.99. On the way home I pulled into a Dunkin store where you could get 6 donuts for $8.49. Can DNUT really gets to 75,000 “points of contact” like this? It is not the craziest idea in the world.
Discussing gold stocks is a little like talking about religion or politics. Let me briefly explain why I am a believer in gold stocks:
There is some truth to the old Markowitz/Sharpe ideas that uncorrelated assets reduce the risk of a portfolio. The problem is they also increase your “tracking error” to the S&P 500, which is a problem to some.
After the Bre-X fraud in 1997 the reporting requirements for gold stocks has significantly improved. There is much more public information on a $100 million market cap gold stock, than similar companies outside the mining world. If you do not know about Bre-X, find an old book entitled “Fool’s Gold” for a good story telling. Main lesson, stay away from helicopters.
Shortly after Bre-X, the guys at the Prudent Bear Fund came across a former geologist turned stockbroker that really knew his stuff. The first time I met him he drew me a picture of Stillwater Mining’s - SBSW - primary mine, and explained why it would never really work. 25 years later he has been exactly correct. With his help we built the second largest junior gold mining portfolio in the US that became 20% of Prudent Bear. From 2002 to 2008 we got crushed short selling, but made up our losses in small gold and uranium stocks. I learned way too much about mining in every corner of the world.
In 2000 the brilliant Peter Bernstein published “The Power of Gold: The History of an Obsession”. The book is about the monetary history of the world. You really cannot have a serious discussion of economic history without reading this book. The world changed forever on August 15, 1971. Governments have become much larger and more powerful since that fateful day. Bernstein gives a very balanced history. He is to my knowledge the only man to manage over $1 billion, and edit a significant academic journal (The Journal of Portfolio Management). If you want some fun reading, try his book on building the Erie Canal.
George Gilder is the author of the most important economics book I have ever read, “Wealth and Poverty”. Gilder is not a trained economist, but he is a keen observer of the world. He wrote a brilliant book in 2016,”The Scandal of Money: Why Wall Street Recovers, but the Economy Never Does”.
Democrats spend too much, and Republicans, that should know better, have made no real efforts to stop them. I blame them both.
Gold (physical and shares, but not ETFs) will always be at least 10% of my portfolio, until economic reality returns to Washington.
How to best invest in gold is a discussion I have bee having for almost 30 years.
With the metal price at an all-time high, my instinct is to stay conservative with what I consider the best run royalty company RGLD. They have over 150 mining interests, and they are small enough that a medium size deal can “move the needle”. Too date results have been at best average, but I love their process. The company gives an overwhelming amount of information on exactly what royalties they own.
Again, if I were 30 years younger I could write you a 10,000 word description of what RGLD does, but it is far easier to tell you to watch their recent investor day presentation.
Let’s think about the alternatives:
The other big royalty companies WPM and FNV are fine investments, but I worry there are not enough big deals for either to grow.
Of the smaller royalty companies I like Sandstorm - SAND the best, but RGLD is a little safer.
Newmont - NM - is my largest personal holding, and has been for over 20+ years. I prefer them to Barrick - GOLD.
Novagold - NG - is a significant personal holding. I walk every morning hoping to live long enough to see the Donlin project get built.
Centerra Gold - CGAU - is my favorite small producer and a client of RGLD
Liberty Gold - LGDTF - no not LGBTQ, is my favorite junior for the ultra-speculative. They just raised $10 million+ to explore in Nevada, the company is run by the guy who helped Prudent Bear with mining stocks in 2002-8.
I just cannot live with the political risks in Africa and South America, this eliminates many stocks. Maybe at the bottom of the cycle I might look through these companies.
I do not trust the ETF’s, do your own work, read the prospectus
I own plenty of the metal myself, in 1 ounce US coins
I have never looked much at silver, there is plenty to do in gold
In the last 10 years, using very round numbers, gold is up about 100% and RGLD and NM have returned about the same. GOLD and several smaller companies have done worse. This is a horrible industry, with way too much risk, but it is still the best hedge against financial disaster.
NEW IDEAS
I really wanted own Advance Auto Parts - AAP. The stock is down from $240 to $65. The thesis is simple, as the recession begins, we will all keep our cars longer, and need more repairs. The problem is AAP has two giant $50 billion serious competitors in Autozone and O’Reilly. AAP is followed by 28 Wall Street firms, and not a single one has a buy recommendation. That is almost enough for me to say buy. There seems to be almost 100% turnover in key positions, and their accounting firm reports “material weaknesses” in their internal controls. I still want to visit some stores, and ask a few questions. The key question is what it will cost to close underperforming stores. Stay tuned.
While digging through auto parts, I stumbled upon a company I had never looked at before LKQ Corp. - LKQ. They supply parts to collision shops like fenders, panels, and bumpers. 5% of the business is folks walking through their 80+ auto graveyards looking for parts they need. The CEO that built the company for the last 14 years is leaving, but an internal guy is taking over. Earnings have been hurt by logistics problems in the Red Sea and Panama Canal. The stock down from $60 to $40 and sells at roughly 10-12x earnings. Auto salvage is tough to understand, and LKQ’s high exposure to Europe is a little scary. The balance sheet is a little messy, from a recent acquisition. More work is needed on LKQ.