The market hasn't been kind to investors in the past six months or so. While some investors were hoping for a continuation of the upward momentum gained in 2011, many investors were disappointed as their portfolios under-performed. Many are now wondering: What happens next? Will things come back? Should I sell everything?
At a recent investment conference, we spoke to Mickey Fulp of the Mercenary Geologist. His newsletter provides insight into the mining industry and junior resource investments that he is watching.
We asked him first for a market overview and what has been happening lately. Mr. Fulp said: "As a geologist, I'm an eternal optimist because the chance of success is so slim in our business. I'm cautiously optimistic but we saw this happen previously in January and February – it looked like the junior market was going to recover but then in March it started going downhill… Until about August."
Things started to turn around in August and especially after Labor Day. Mr. Fulp listed two key reasons for the improvement – Labor Day itself and the third Quantitative Easing implemented by the Federal Reserve. "After Labor Day, everybody comes back to work so there is more volume and that results in higher market capitalizations. And QE3 has bumped the price of gold, which went up about $100 in two separate afternoons. Gold was very range-bound and it popped out of that channel. QE3, and whatever the Europeans call what they did, have led to a better commodities market. We saw the price of oil go up; we saw the price of gold up; we saw the price of copper go up; when that happens, resource stocks get carried along.
"Overall, markets are looking better," Mr. Fulp reported. He also believes that today's economic policies will mean better commodity markets in the future: "These fiat currencies are going to continue to be devalued and therefore commodities prices will go up in all currencies. That is going to trickle down to all the markets, and even down to the junior resource sector."
That is good news for investors who were wondering what was happening with their portfolios but many investors are still wondering "What should I do now? Should I wait?"
Mr. Fulp pointed out what he was doing when the markets were weak: "I bought stocks all summer long," he said. "I haven't bought stocks lately. I've been selling into this rally because I see the opportunity to reposition my capital to companies that are fundamentally stronger or haven't made quite the recovery. I'm always moving money around." Ultimately, Mr. Fulp (who is a contrarian investor) suggests that investors do their due diligence and find something that has promise but other people are selling. He said: "Anything that is beaten up but is fundamentally strong is what you want to look at. You want to buy stocks when they're down and when no one else is buying."
So we asked him about specific metals and companies. Since he is not a licensed financial advisor, he simply shares what he is watching right now.
One of the metals that has caught his attention is uranium: "My view is that the uranium industry is completely beaten up right now. It's what I was buying most over the summer. I'm not going to put a time-frame on it, but uranium companies will come back. 14% of the world's electricity is supplied by uranium. In the US, one out of every 5 people who turn on a light switch are getting electricity from nuclear and those reactors have to be fed. The long-term viability of the uranium industry looks very strong to me. Whenever these stocks get beaten up, I add to my positions in fundamentally strong companies."
Among the companies he likes is Strathmore Minerals (TSX: STM) and the company's stock price movements are instructive to investors who want to know how Mr. Fulp is investing: "We picked Strathmore Minerals as a website sponsor in March of 2009 at $0.22/share. In seven weeks it went to $0.82. That's almost a four-bagger. It eventually went to $1.58 pre-Fukushima. It's trading now at about $0.22/share. Nothing has changed with the company except they've gotten closer to project development, so why wouldn't you want to own this stock? I certainly do and hold a relatively large position. And why wouldn't you want to buy it when it's down? That's my contrarian philosophy."
Within uranium plays, Mr. Fulp is forecasting a consolidation in the New Mexican uranium business among the top two or three players. "That's going to be good for the business," he said.
Uranium isn't the only thing that Mr. Fulp is watching. He reported: "I'm always looking for a tungsten play…. And I'd like to find a good antimony company."
He's also watching rare earth elements. "I think the rare earths are starting to recover and we'll see better days ahead for the cream of the crop in the rare earth space. Quest Rare Minerals (TSX-V: QRM) is also a sponsor of my website and I'm a committed shareholder. It's trading about $1.25/share. We picked that stock at $2.85, it went to $8.88 so if you follow my trading methodology, you made good money on it; maybe it's time to buy back in?."
Every interview with Mickey Fulp ends with some good advice for investors. Mr. Fulp talked about his theories of price movements in junior resource companies, and how investors could benefit from it. He said: "When you find fundamentally strong companies, oftentimes a philosophy that will work is to have a trading position and a long-term position. A long term position might be based on the idea that they make a mine or they're going to be acquired. But you can also have a trading position where you move in and out of these stocks when they go up and down… Because they all will go up and down."
Mr. Fulp has talked about this doubling concept in previous interviews: "Every junior resource company will double [its share price] from its low in any running 52-week period. You just have to buy them when they're low and sell them when they're high. ." Mr. Fulp's advice is to wait for the stock to double, sell half to recover your initial stake, and take profits by program selling tranches on both the uptick and downtick.
According to Mr. Fulp, strong companies in the junior resource market are coming back. It might not bounce back completely in the short term, and there will be some intermittent declines, but Mickey Fulp is cautiously optimistic that the resource market will continue to present a profit-making opportunity for investors.