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Gold, Oil, and Burgers

Written by Briton Ryle
Posted June 3, 2015

The best article I read yesterday was this piece on South Carolina senator Lindsey Graham. He said:

What’s wrong with Washington is we talk too much and we don’t drink enough... Ronald Reagan and Tip O’Neill would have a drink every afternoon. They didn’t yell at each other on cable TV. They had a working relationship.

Amen. I've got South Carolina roots. My parents met in high school in Augusta. My grandparents lived out their lives in Columbia. And I have an aunt and uncle and a few cousins in Charleston.

I very much appreciate Senator Graham's desire to get a little Southern hospitality back into politics.

Here are a few other things on my mind:

  • Gold prices fell below $1,400 an ounce in May of 2013. And they've been between $1,100 and $1,350 ever since. Two years... that's a pretty long time for any asset to consolidate. But gold isn't just any asset. Gold bugs say it's the only reliable currency because its value can't be debased by central bank actions like paper money.
    Gold detractors like Warren Buffett say gold has no utility and therefore should be valued in the same way companies are.
    Companies can grow by selling more product and can earn more in profit by increasing efficiency. Gold can't do that. Gold is basically dependent on the U.S. dollar for its value. 
    However, gold mining companies can increase revenue by selling more. And they can earn more profits by increasing efficiency. I can't tell you what gold prices are going to do. But gold stocks look pretty good right now...
    Barrick Gold (NYSE: ABX) was a $50 stock in 2011. Today it's around $12. The last time it was below $12 was 1992.
    Newmont (NYSE: NEM) broke briefly above $70 back in 2011. It's around $27 now after briefly dropping below $20 last December. You gotta go back to 2000 for the last time that happened.
    Seems to me it's a good time to own gold mining stocks. The upside will be explosive when it comes. But instead of buying one particular miner, why not buy them all? With the GAMCO Global Gold, Natural Resources & Income Trust (NYSE: GGN), you can. This closed-end fund run by Mario Gabelli's GAMCO holds all the most important gold miners. It's a little over $7 a share and will pay you nearly 12% a year in monthly dividends. The fees are not too bad either, at 1.25%.
  • I wrote about Alcoa (NYSE: AA) on Monday. The recent drop below $13 looked like a good opportunity, considering the bullish outlook I have for the company. Right on cue, shares rallied +2% after May auto sales came in very good. Cars these days use a lot of aluminum, but more importantly, the aluminum-bodied Ford F-150 is selling well.
    Ford is still ramping up production of these trucks after it re-tooled factories last year. Ford should hit full production levels this summer, and that will be good for Alcoa. Also, Boeing (NYSE: BA) started making the first 737 MAX airplanes this week. The first deliveries of this plane are slated for the third quarter. Boeing has 2,724 orders for the 737 MAX.

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  • They're calling it "Burger Wars." Americans still lover burgers, just not McDonald's (NYSE: MCD) burgers. Now we want Five Guys, Shake Shack (NYSE: SHAK), Red Robin (NASDAQ: RRGB), and Habit Burger (NASDAQ: HABT).
    Shake Shack has all the buzz right now. Its stock has continued to amaze — but not exactly in a good way. It's up huge, but with $126 million in trailing sales, the company has a lot of work to do to justify the $2.8 billion market cap.
    Red Robin did $1.2 billion in revenue over the last year. Its market cap is just $11.18 billion. It's clearly a better buy than Shake Shack. The dark horse may be Habit, which did more in sales than Shake Shack over the last year — $191 million vs. $126 million. Yet it's valued at $455 million, a fraction of SHAK's valuation.
    Yeah, Shake Shack stores have the cool factor. But the stock price is ridiculous.
  • Oasis Petroleum (NYSE: OAS) remains my favorite oil stock. My Real Income Trader subscribers have $3 per share (21%) in capital appreciation and another $2.75 a share in cash income from covered call sales. Oil prices have been very steady around $60. I was expecting oil to retest $50 but it has been quite stubborn, and analysts have started to raise their earnings estimates for oil companies.
    If you're interested, Laredo Petroleum (NYSE: LPI) looks pretty good, too.
  • Can we stop talking about stock market bubbles yet? I'm mystified that people like Robert Shiller keep calling stocks a bubble when the trailing P/E is around 18. I have no problem if you think stocks in general are a bit expensive. But that's just not bubble territory. You have to have irrational exuberance to have a bubble. You have to see the "it's different this time" mentality emerge, thinking that things can only get better. Seems to me many investors think things can only get worse...
    And besides that, there are cheap stocks out there. Ford's forward P/E is 8, for crying out loud. Bank of America (NYSE: BAC) is 10. Intel (NASDAQ: INTC) has a forward P/E of 14, and for Cisco (NASDAQ: CSCO), it's 13.
    Sorry, but these simply aren't bubble valuations.
  • It's great that no one's freaking out over the possibility of a Greek default. I wish Apple would just get it over with and buy the country.

That's what I've got for you today. Talk to you soon.

Until next time,

Until next time,

brit''s sig

Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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