Taylor Dart, Author at INO.com Trader's Blog

Which Is The Better Silver Mining Stock?

Posted on August 1, 2022July 29, 2022 by Taylor Dart

Following a violent correction in the Silver Miners Index (SIL) year-to-date, many investors are hunting for deals in the sector.

While the silver producers offer very nice leverage to the metal, given that their margins can increase rapidly as the price of silver increases, not all of them are created equal. This is why holding the best names when selecting which ones to purchase to complement one’s portfolio is essential.

In this update, we’ll look at SilverCrest Metals (SILV) and First Majestic (AG) and see which one is the better selection for one’s portfolio:

Size & Jurisdictions

Regarding size, First Majestic is a much larger producer, on track to produce more than 33MM silver-equivalent ounces this year, making it one of the largest silver producers sector-wide. The company also benefits from diversification, owning three mines (San Dimas, Santa Elena, and La Encantada) in Mexico and a gold mine in the #1 mining jurisdiction: Nevada.

This compares favorably to SilverCrest Metals (“SilverCrest”), which owns just one mine in Mexico that is ramping up towards commercial production, and will produce just 12.0MM silver-equivalent ounces in 2023. So, with a lack of diversification (1 mine vs. 4), a slightly less attractive jurisdictional profile (no production from Tier-1 ranked jurisdictions), and a smaller production profile, First Majestic Silver wins by a wide margin in this category.

First Majestic - 1 / SilverCrest - 0 Continue reading "Which Is The Better Silver Mining Stock?" →

These 2 Retail Giants Are Trading at a Steal

Posted on July 29, 2022July 27, 2022 by Taylor Dart

Few sectors have been hit as hard as the Retail Sector (XRT) over the past nine months, with the ETF finding itself down 45% from its highs at its June lows.

This shellacking should not be a huge surprise, given that the group was coming up against impossible year-over-year comps in Q1/Q2 2022. This was related to the benefit of government stimulus on sales in the year-ago period, with margins also under pressure due to labor inflation and higher shipping costs.

The index is now finally lapping this unfavorable period, but it’s dealing with another issue: worries about a global recession.

While few sectors are hit harder than retail in a recessionary environment, all businesses are not created equal, and many can weather the storm much better than their peers.

This is especially true of the businesses that lean more towards staples than discretionary or those companies that benefit from a trade-down environment, with these being off-price retailers.

If the sector is destined for lower prices once a recession is confirmed (which looks like a high probability), it’s understandable that some investors aren’t in a hurry to invest. However, I believe two names stand out as cheap with high-quality businesses that should outperform the group.

Let’s take a closer look below: Continue reading "These 2 Retail Giants Are Trading at a Steal" →

Golden Opportunity for These 3 Mining Stocks

Posted on July 26, 2022July 26, 2022 by Taylor Dart

It’s been a tough year for investors in the Gold Miners Index (GDX), with the ETF shedding 38% of its value since its April highs.

It’s been a tough year for investors, with the ETF shedding more than 45% from its multi-year highs. A gold price decline exacerbated this tumble. For the weakest producers, this is a concern.

While this has led to many investors steering clear of the sector, some miners are now at their lowest multiples since the 2015 bear market bottom, when margins were half what they are today. Many miners were carrying considerable amounts of debt.

Today, this same group of producers will enter Q4 2022 in net cash positions, are paying out dividends double that of the S&P-500 (SPY), and are much more disciplined, learning from past mistakes. To summarize, I see this as a rare opportunity to buy a few high-quality businesses.

Let’s take a look at three stand-out names below: Continue reading "Golden Opportunity for These 3 Mining Stocks" →

Two Restaurant Stocks to Buy on Dips

Posted on July 17, 2022July 15, 2022 by Taylor Dart

It’s been a rough year for the restaurant industry, with the index declining over 40% from its highs, and many weaker operators like Red Robin (RRGB) cut in half.

The bear market in these names has been attributed to commodity and wage inflation which has pinched margins, but also due to very difficult year-over-year comps following the surge in traffic from government stimulus and diners anxious to get back to everyday life in Q1/Q2 2021.

Unfortunately, while restaurants should have been out of the woods by Q3 2022 after lapping these insurmountable comps, they’re now contending with a new issue: traffic. This has resulted from shrinking discretionary budgets with consumers hit with rising mortgage payments, rising gas prices, and the cost of groceries continuing to skyrocket.

So, while margins held up relatively due to sales leverage in 2021 and menu price increases, it could prove more challenging to pass on costs this year.

The good news is that while much of the sector has been sold off for a good reason, a few companies are being dragged down with little justification due to the bearish sentiment.

Two companies that meet these criteria are Wingstop (WING) and Restaurant Brands International (QSR), which have found themselves more than 35% from all-time highs. Let’s take a closer look below:

Wingstop (WING)

Wingstop is a mid-cap restaurant company offering classic wings, boneless wings and tenders, and it has enjoyed considerable growth since going public.

The company has seen its store count increase from 998 stores in 2016 to an estimated 1,950 in 2022, translating to an impressive 11.8% compound annual growth rate. This is helped by the company’s phenomenal unit economics (sub-two-year payback), making it an attractive brand for multi-unit franchisees.

So far, the company’s unit growth is not slowing despite its scale, with an estimated 250 stores to be opened in 2023, representing a 13% growth rate.

Although discretionary spending budgets are declining, Wingstop is in a unique position. This is because it has a relatively low average check compared to casual dining restaurants. Besides, while we are seeing commodity inflation in most proteins (beef, seafood, pork), bone-in wing prices are seeing deflation.

So, while other restaurants might be raising prices to protect margins, even if at a slower pace, to ensure they don’t hurt demand, Wingstop could hold prices steady, allowing its value proposition to stand out among its competitors in the quick-service space.

Therefore, Wingstop looks to be an interesting defensive play in the restaurant space, and I would not be surprised to see the stock trade back above $110.00 before year-end.

Source: YCharts.com, FactSet, Author’s Chart

Looking at the chart above, Wingstop is not cheap, which is why I’m not long the stock yet, given that it trades at more than 48x FY2023 earnings estimates ($1.87). However, the stock does deserve a premium multiple given its double-digit unit growth rates and ability to grow earnings at a rate well above that of its peer group.

Based on what I believe to be a conservative EBITDA multiple of 24 and FY2023 EBITDA estimates of $130 million ($4.33), I see a fair value for the stock of $103.90, pointing to an 11% upside from current levels.

However, given that I prefer to buy at a minimum 20% discount to fair value, I think the name is one to keep a close eye on, but the ideal buy zone is at $83.00 or lower on any dips.

Restaurant Brands International (QSR)

Restaurant Brands International is a large-cap restaurant company with a leading franchised position among its peers, with over 99% of its restaurants franchised.

The company is best known for its brands Popeye’s Chicken, Burger King, and Tim Hortons, but it also recently acquired Firehouse Subs, a rapidly growing, digital-focused sandwich company with over 1,200 restaurants.

This acquisition pushed the company’s total restaurant count to more than 29,000, but it is confident that it can push its total store count above 40,000 by 2027. This would translate to more than 35% growth from current levels, making it more attractive than McDonald’s (MCD), in my view, which is relatively saturated and must rely on same-store sales than global expansion.

The key differentiator for Restaurant Brands is that it could be a trade-down beneficiary. While consumers might cut back in a recession, they are less likely to cut back on things that offer value and convenience. When it comes to a morning coffee/sandwich on the way to work or lunch coffee/snacks like Tim Hortons offers or value meals from Burger King and Popeye’s, I see these as staples more than discretionary items.

In contrast, one might argue that fine dining and casual dining are highly discretionary. Therefore, I do not expect the negative traffic trends that we’re seeing in casual dining to seep into the quick-service space, and if they do, I expect them to be much less pronounced.

I also believe that QSR has a much better chance of mining customers’ data to drive additional visits, given its high proportion of digital sales. Finally, given the lower average check, I see less resistance to menu price increases in quick service vs. casual dining.

Looking at the chart below, we can see that QSR is currently trading at barely 15x FY2023 earnings estimates at a share price of $51.00, which pales in comparison to MCD at ~23x earnings and YUM at ~21x earnings.

In my view, this is completely unjustified, even if QSR’s largest brand (Burger King) is seeing a slower turnaround than planned. Even if we apply a discount and use a more conservative earnings multiple of 19.5x FY2023 earnings, I see a fair value for QSR of $66.10 per share, translating to a 30% upside from current levels.

Combined with a 2.0%+ buyback and a 4.0% dividend yield, the stock is a steal at current levels.

Source: YCharts.com, FactSet, Author’s Chart

It’s easy to be bearish on the restaurant space given all the headwinds, and there are certainly many names in the casual dining space that it’s best to avoid.

However, I believe names like QSR and WING have been unfairly punished and are now trading at their most attractive valuations in years following this pullback. Therefore, I see QSR as a Buy on any dips below $50.00, and I would view any pullbacks below $83.00 on WING as buying opportunities.

Disclosure: I am long QSR

Taylor Dart
INO.com Contributor

Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.

Three Gold Miners on Sale

Posted on July 4, 2022July 1, 2022 by Taylor Dart

Disgust. Despair. Robbed. These are just a few of the emotions likely felt by investors in the Gold Miners Index (GDX), which are looking at the ETF trade at the same level it did over two years ago when the gold price (GLD) sat below $1,525/oz.

Worse, this pathetic performance has occurred in a period when the Federal Reserve has been its most dovish in years ahead of the past two meetings.

Now, staring down the possibility of two additional rate hikes, it's understandable that investors are on pins and needles, worried about the effect of additional rate hikes on gold and the miners. As the saying goes, though, it's always darkest before the dawn, and with sentiment arguably the worst in years, I believe this has presented some opportunities in the gold miners.

Source: TC2000.com

With the Federal Reserve's mission being to stamp out multi-decade inflation readings, they've adopted one of their most hawkish stances in years, planning to raise rates four times this year.

Conventional wisdom would suggest that does not make owning gold very attractive with an alternative (higher interest rates) suddenly available.

However, the more important metric to watch is real rates, defined as the three-month treasury bill minus the current inflation rate. When real rates are in negative territory, gold tends to perform its best, given that there is a cost to not owning gold.

Source: Real Rates, YCharts.com, Author's Chart

Despite the recent rate hikes, this key indicator continues to sit deep in negative territory, hovering near (-) 7.00%. This means that even if investors are getting a better interest rate, it's being eaten away by inflation, it's which is likely to remain above 5.0%.

So, why gold miners? Gold producers mine and process gold for those unfamiliar, and they provide significant leverage to the gold price. Historically, owning them over the metal hasn't made much sense, given that they didn't pay dividends and had much higher beta to the gold price, and lacked growth.

However, for once in a decade, many of the best producers have low debt, are paying 3.5% plus dividend yields, and have growth. This makes them far more attractive than the gold price, getting leverage on the metal while being paid to wait.

Let's look at three names that stand out from a quality standpoint.

Agnico Eagle (AEM)

Agnico Eagle (AEM) is the third-largest gold producer globally, on track to produce 3.3 million ounces of gold in 2022 at all-in sustaining costs [AISC] below $1,030/oz. This makes it one of the highest-margin producers and the lowest-risk, given that it operates in the safest jurisdictions globally with 11+ mines.

Notably, AEM recently added two ultra-high-grade mines to its portfolio and the largest gold mine in Canada: Detour Lake. The company did this by merging with one of the best growth stories in the sector, Kirkland Lake Gold.

In most circumstances, I would avoid a large producer like Agnico Eagle, but the company has one key differentiator from its peers after its recent merger, which is growth.

To date, the company has not given any firm targets or long-term production guidance, but given the company's solid pipeline, which leverages existing infrastructure, I see a path to annual production of 4.3 million ounces of gold by 2029. This would represent 30% growth from current levels, 2500 basis points higher than its peer group of multi-million-ounce producers.

While most gold producers will rely on the gold price to increase earnings and free cash flow looking out over the next six years, AEM will not. Despite this growth, the company trades at its largest discount to net asset value in years, with
what I believe to be a fair value of $78.00 per share.

So, with the stock hovering below the $48.00 level, AEM is my favorite way to get gold exposure currently, especially with a 3.4% dividend yield.

Royal Gold (RGLD)

Another name that recently moved onto the sale rack is Royal Gold (RGLD), the third-largest precious metals gold/streaming and royalty company.

Unlike Agnico Eagle, Royal Gold makes an upfront payment to gold developers and producers, and in exchange, it receives a portion of the production over the project's life. This protects the company from inflationary pressures, which is essential at a time of rising costs like we're seeing currently.

Royal Gold reported attributable production volume of 88,500 gold-equivalent ounces [GEOs] in Q1 and is on track for up to 340,000 GEOs this year.

However, with a solid organic growth pipeline, there is a meaningful upside to this outlook over the next few years, with the potential for 410,000+ GEOs per annum, which is a change from the past few years when the company was in its investment phase and lacked growth.

Despite this attractive growth outlook and 80% plus margins, Royal Gold currently trades at just 25x FY2023 earnings estimates vs. its historical earnings multiple of 50x earnings (20-year average). Even using a more conservative multiple of 38x earnings, which is easily justifiable for a company with 80% margins and recurring revenue, I see a fair value of $162.20. So, with the stock currently sitting below $108.00, this looks like an attractive buying opportunity.

Karora Resources (KRRGF)

Karora Resources (KRRGF) is the riskiest name on the list, sporting a market cap of barely $400 million and being a sub-150,000-ounce gold producer in Australia. However, it also has the most upside by a wide margin and looks very attractive for a small bet.

The reason is that it boasts one of the most impressive organic growth profiles, on track to increase production from 120,000 ounces in 2022 to 220,000 ounces by 2026. The company expects to achieve this by adding a second decline at its Beta Hunt Mine and using additional processing capacity from a recent mill purchase north of the mine.

Like AEM, this will allow Karora to grow earnings and free cash flow meaningfully regardless of the gold price, with any gold price upside being a bonus. So, with the stock trading at less than 1.3x FY2025 revenue estimates, this pullback below US$2.60 looks like a gift.

Final Thoughts

The gold producers are a high-risk area of the market, but once every couple of years, there's a fat pitch, and they get sold down to levels where they trade at massive discounts to fair value.

After the most recent decline in the GDX, we have reached this period, and I see the potential for a 25% plus upside over the next 9 months in the sector while collecting a 3.0%+ dividend yield in names like AEM. Hence, I see AEM, RGLD, and KRRGF as attractive ways to diversify one's portfolio.

Disclosure: I am long AEM