Forget Gold: Buy Silver Stocks Instead

Gold, gold, gold.

Aren't you getting sick of hearing about gold all the time?

Sure it's hitting new all-time highs. It's a good "story". But other metals have been outperforming gold all year and they get no love.

Silver, gold's less glamorous precious metal cousin, has never gotten the same kind of love but it's time it did. It just has, frankly, a bad image. Maybe it needs a new PR rep.

It's the "working" metal as it's not just used in jewelry and silverware but also in many industrial uses such as in cars and in computers and other electronics. That gives it two different customers and as the global recovery continues, demand from the industrial side should increase.

How Do You Invest in Silver?

Because it's not hitting all-time highs, silver gets very little press. No matter that over the last month it has been outperforming gold by a mile.

Silver over the last 30 days: up 20%
Gold over the last 30 days: up 9%

You can always buy the physical metal, either in bars, coins or jewelry. Be sure to check your wallet. Quarters minted before 1964 actually have real silver content and I have occasionally nabbed one that is still in circulation.

Another way to invest is through ETFs. There is a silver ETF that invests in the physical silver.

But a more intriguing investment option is to buy the mining stocks. There actually are mining companies that specialize solely in silver. There are fewer of them than for gold, but they do exist.

Isn't Everyone Already In the Stocks?

Investor interest in the silver miners has been rising in recent weeks as silver prices have surged. Many of them are at new 52-week highs.

They also aren't cheap. As a group, they are trading with a forward P/E of 29 and a price-to-sales ratio of 10.

An investor in the silver miners is banking on rising earnings, as silver prices rise, to provide value.

With silver at 30-year highs and poised to possibly go higher, as long as the miners can get the metal out of the ground (which is always the hardest part, of course), and keep costs down, the future looks bright.

3 Silver Mining Companies Expected To Grow Earnings in 2010

Hecla Mining (HL - Snapshot Report) is the largest silver miner in the United States and mines a little bit of gold on the side as an added bonus.

With an average cash cost per ounce forecast between $1.90 and $2.25 per ounce and silver now trading over $24 an ounce, the company is seeing tremendous cash flow.

In the second quarter, it boosted its cash on the balance sheet to $197 million from $116 million. The company also reaffirmed its full year guidance of 10 to 11 million ounces of silver produced.

2010 Estimates Revised

3 estimates have been revised for 2010 in the last month with 2 being lower and 1 higher out of 8 estimates. The Zacks Consensus has actually risen a penny to 24 cents during that time.

This is earnings growth of 18% over 2009. The company is scheduled to report again on Oct 26.

It's P/E is 29?

Hecla might seem expensive at 29x forward earnings and compared to the S&P 500, it is. But it is in line with its peers.

Hecla is a Zacks #3 Rank (hold) stock.

Despite the soaring silver price, Hecla is trading well below its 2008 high.

Silver Wheaton (SLW - Snapshot Report) is a different play on silver than the other two companies. It is a metals streaming company which means that it doesn't actually mine the silver but it pays others to do so.

The company currently has 15 silver purchase agreements, and 2 precious metal agreements, where it can then purchase its silver production.

It doesn't hedge its silver production so it is taking advantage of these 30-year high prices. Another one of its advantages are that its mines are in politically stable regions.

Silver Wheaton is forecasting production of 22.2 million ounces of silver and 20,000 ounces of gold in 2010. Its total cash cost for the first six months of 2010 were $4.03 per ounce.

In the second quarter, silver production increased 33% over the same quarter in 2009 which pushed earnings up 200%.

Analysts Revising 2010 Estimates Higher

2 out of 12 estimates have moved higher on 2010 in just the last week. The Zacks Consensus is holding at 70 cents, however.

Earnings are expected to grow 85% as the company made just 38 cents last year.

How Expensive Is It?

The P/E ratio is at nose bleed levels of 39x forward earnings.

But with earnings expected to grow at an average of 71% over the next 5 years, the company has a PEG ratio of just 0.6 which puts it into the more affordable camp.

The stock has been on a tear, however, now trading at 5-year highs.

Pan American Silver Corporation (PAAS - Snapshot Report) operates 7 silver mines in Peru, Mexico, Bolivia and southern Argentina.

On Aug 11, the company reported second quarter results which saw record silver production that increased 18% to 6.9 million ounces. Cash costs also declined 6% to $5.64 per ounce.

The balance sheet isn't too shabby either, with cash and short term investments at $237.7 million at the end of June and no debt. It also has a $70 million credit facility but it hasn't had to draw on it.

Analysts Raising Estimates In the Last Week

The higher silver prices are playing with the analysts estimates. How do they keep up with the rising prices? 1 estimate has moved higher in the last week for 2010.

Earnings are expected to climb 25.5% to 89 cents in 2010. Analysts are even more bullish about 2011, with earnings forecasted to climb another 59.2%.

It's Not Cheap

Once again, Pan American Silver is not exactly a cheap stock. It is trading with a forward P/E of 34 and has a price-to-sales ratio of 5.

It is also a Zacks #3 Rank (hold) stock. We'll have to wait until Nov 11 to get third quarter results.

Shares have also been jumping, along with silver prices, but the stock is still trading well-below its 2008 high.

[The author of this article owns shares in the Silver ETF (SLV) and Pan American Silver (PAAS).] Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service. You can follow her at twitter.com/traceyryniec.

 

 

Source: "Forget Gold: Buy Silver Stocks Instead" at Zacks.com

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