By David Forest, editor, Strategic Investor
Historically, the period from October through January is the strongest time of the year for stocks.
But of course, not every stock is a bargain.
And nothing goes up in a straight line…
So how do you figure out which stocks to buy and which to avoid?
At Casey Research, we have a tried, tested, and proven method for doing just that.
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing our best investing ideas, and how you can take advantage of them.
Today, we’ll show you the method I (Dave Forest) use to pick some of our biggest winners.
The “Nine Ps”
Doug Casey, the founder of our business, is well-known for many things. And depending on who you ask, some folks will know Doug for his political commentary. (One of his well-known quotes is about democracy, where he says, “It’s just mob rule dressed in a coat.”)
Others will know Doug for his macroeconomic views – if that’s you, you’ll know he doesn’t think much of the Federal Reserve or central banks in general.
Still… others will know Doug for his visionary views on technology. He was among the first (maybe the first) to foresee the rise of mass interactive media.
But there’s perhaps one thing that most people associate with Doug – huge wins in commodities speculations.
And it’s here that Doug developed his proprietary research method, which we use at Casey Research to evaluate resources stocks. This is Doug Casey’s “Nine Ps”…
The First Four
The best way to look at it is the “Nine Ps” are a simple question-and-answer process we use to build a picture of resources plays.
And the great thing about this method is that you can use it with your own investments. You don’t need fancy qualifications… or to be a math whiz.
It’s common sense, intuition, and a little bit of good old-fashioned digging around a company’s financial reports.
We’ll explain the basics of the “Nine Ps” today and tomorrow. It’s not the full description, but it’s definitely enough to get you started. (At the end of this essay, we’ll explain where you can get ahold of the full details.)
So let’s begin. Today, we’ll take you through the first four of the “Nine Ps.” Tomorrow, we’ll return with the remaining five.
People – Is There a “Superstar” on Board?
The first question you want answered is, “Who are the key players involved with the company?”
As is the case with all human beings, some are more skilled, honest, and hardworking than others.
You can find this information from a variety of sources, starting with management biographies (available on company websites). Then you can do research by talking with the managers themselves or their investor relations staff.
(Talking with people is why I’m such a huge proponent of “boots-on-the-ground” research. There’s no better way to evaluate “People” than by shaking their hands.)
If that’s not feasible, you can use a service like Stockwatch.com to research the track record of the previous companies the management has been involved with. If someone is a known snake oil salesman or poseur, chances are good you’ll ferret out that fact with just a couple of phone calls.
Also, look for executives who are moving companies. When there is a labor shortage (like there is now), superstar mining pros can have their pick of the opportunities.
Of course, if you notice that a superstar pro has left a company… that could be a negative indicator.
Property – Nevada, South America, or Mongolia… It’s Never Too Far
Here’s a sobering number. Between 95% and 99% of all the properties controlled by mining companies will never actually become mines.
That’s because it’s time-consuming and expensive to find a mineral deposit with the potential to host an economic resource. And unlocking the economic value of the minerals is even more so.
The cost of building a mine and a mill starts at a minimum of $50 million… and can climb to a billion or more.
The good news is that you can make a fortune investing in companies that, for one reason or another, will never go into the production stage. It’s all a matter of timing and knowing when to sell.
Alternatively, another great way to profit from mining exploration companies is to wait until they hit the “Golden Runway.”
That’s the period after the initial excitement of the discovery has faded away… and after the company has spent a fortune developing the mine.
But either way, the bigger and more geologically credible the prospective deposit, the better. But how can you tell if the exploration site is going to be a big hit?
First off, ignore claims made by mining company executives that are not derived from, at the minimum, drill results.
I like to focus on companies that have tested their geological theories with a drill program and come up with logical results. Then, I get a second opinion from a consulting geologist who will verify the company’s interpretation of the data.
Even so, you shouldn’t always take the company’s word for it. Often, I (or one of my research team members) will visit the property. That’s regardless of whether it’s in Nevada, South America, or Mongolia.
Bottom line: when it comes to property, make sure that you are investing in companies that are chasing elephant-sized deposits.
Paper – Don’t Catch That Falling Knife!
Analyzing the structure of the company is as important as the geology of a company’s property holdings. That’s because some companies will too quickly dilute existing shareholders by raising money from sweetheart financings completed through private placements, often with full warrants.
To that end, we probably spend more time looking at the financial structure of a company than any other aspect.
How many shares are outstanding? Who owns the shares? What percentage does management own? (I like to see management have a clear incentive for success.)
Are any seed or private placement shares about to come free trading and, if so, when and in what quantity?
That last question can be crucial from a timing perspective. Take a position in a stock just before many cheap shares from a private placement come free, and you could be trying to catch a falling knife.
Conversely, if you wait a bit, then put in a cheap bid, you can buy smart.
It is always worth understanding who’s got the paper, at what price, and when the company may issue more.
Promotion – A Soft Spot for These Companies
“You can have the greatest product in the world, but still go broke if no one knows about it” is an old business adage that holds true in mining as well.
In more instances than I can remember, I’ve come across a well-run company turning up strong results on a geologically attractive property… and company’s shares are selling for pennies.
In these cases, the missing element is “Promotion” – the fine art of being able to communicate your story to the broad community of investors and analysts.
I have a soft spot in my heart for these companies, which are typically run by mining engineers and geologists. These scientifically minded individuals who sincerely believe that if they do their work well, the market will eventually discover them.
While that occasionally happens – and finding an underpromoted company can offer us a terrific opportunity – more often than not, these companies run out of cash and are unable to raise additional financings… at least at a cost that is not harmful to shareholders.
If you can find an underpromoted company with real merit that has just hired an investor relations staff or engaged a firm that specializes in corporate public relations, you can make a very nice return very quickly as the company gets the recognition it deserves.
So promotion can be a good thing. It can, however, also be a bad thing when a company is built solely around it.
It’s that kind of company that proves true the old Mark Twain quip, that a gold mine is “a hole in the ground with a liar standing over it.” But if you do your homework, it won’t be long before you can tell the real cowboys from the ones that are all hat and no cows.
So these are the first four of the “Nine Ps,” the method I use for evaluating resource stocks.
I hope you’ve found it useful… Maybe you can begin using and doing some of this analysis with your own investment picks.
See you tomorrow.
Editor, Strategic Investor
P.S. Tomorrow, I’ll share the remaining five of the “Nine Ps.” Like the four I’ve shown you today, they are all integral to making sure you pick the right stocks for the best chance of making big returns in resources.
But this isn’t the only method I use to evaluate future big winners for my readers. Another is the “TUV method”… and it’s led my readers to gains of 393%… 2,805%… and even 4,942%.