Downgrading Resource Stocks

Downgrading Resource Stocks: "Hold" This
by Eric J. Fry
The Rude Awakening
Wall Street, New York
Friday, July 22, 2005

Eric Fry warns of the mistake many stock analysts are making in downgrading Resource Stocks.

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The Rude Awakening PRESENTS: Rumors of the commodity bull
market's demise may be as premature as Wall Street's recent
"Reduce" ratings.

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"HOLD" THIS
By Eric J. Fry

It is very easy to recommend selling a stock you never
would have purchased in the first place. Wall Street
analysts do that all the time. But it is much more
difficult to continue holding a stock that you actually
own, after it has already doubled or tripled or quintupled.
Successful investors do THAT all the time.

Even though most resource stocks have doubled or tripled
over the last three years, they might have some juice left
in them...maybe a lot of juice, especially now that the
Chinese have begun to "re-value" the yuan.

But over recent days, many Wall Street analysts have been
rushing to issue "Sell" and "Underperform" ratings on
various resource stocks. The stocks are "fully valued," the
analysts explain.

Maybe yes, maybe no.

But we suspect these recent downgrades will seem ill-
advised, when viewed from the 20-20 hindsight of July 2007
or 2008. In other words, we'd ignore the dubious advice to
sell lowly valued resource stocks in the middle of a
resource-stock bull market.

For one thing, no matter how informed and earnest Wall
Street's recommendations might appear, they sometimes lack
intellectual honesty, as the table below clearly
illustrates. In January of 2003, for example, the Canadian
brokerage firm, TD Newcrest Securities issued a buy
recommendation on Suncor Energy at $15.70 a share. So far,
so good.

But eight months later, TD lowered it's rating to "Reduce,"
even though the stock had barely budged. Over the ensuing
two-and-a-half years, as the stock more than doubled, TD
steadfastly maintained its "Reduce" rating. Finally, last
month, TD upped its rating on Suncor to "Hold."

"Hold what?" We wondered. Anyone following the firm's
advice would have sold their SU stock months before.

Smith Barney issued a very different series of quirky
ratings on ExxonMobil. The well-known Wall Street firm
issued a "Sell" rating on Exxon in March of last year,
while the stock was changing hands at $39. The analyst at
the firm maintained a dim view of the stock for nearly a
year, before raising his rating to a "Hold." Again we would
ask, "Hold What?" Finally, two months ago, AFTER the stock
had gained nearly 50%, Smith Barney issued a "Buy" on
Exxon.

In this particular instance, Smith Barney's recommendations
may have been honest, but they weren't very helpful. In
short, we'd rather solicit advice from an impaired
laboratory monkey than a Wall Street analyst.

To be a seller of resource stocks, the long-term investor
must believe that the bull market is over. We do not. Nor
do we believe that the long-term demand for energy
products, base metals or most other resources will slow
enough to trigger a long-term sell-off in resource stocks.
To be sure, short-term volatility – sometimes wicked
volatility – will nip at the heels of resource investors.
But, we would be slow to interpret such periodic nuisances
as reasons to abandon long-term investments in the sector.

Rather, a wealth of anecdotal evidence seems to suggest
that the bull market in resource stocks has some room to
run.

First up, despite rumors that the Chinese economy is
slowing, the official statistics don't support that notion.
Tuesday, China's National Bureau of Statistics announced
that the country's GDP surged 9.5% from a year earlier,
after climbing 9.4% in the first quarter. Industrial
production rose 16.4%, while investments in fixed assets
and real estate surged more than 20% each during the
quarter, spearheaded by an 80% jump in coal mining
investment.

GE's head honcho, Jeffrey Immelt, lends credence to China's
official government statistics. "We don't see any
appreciable slowdown [in China]," Immelt said last week,
"We continue to see good interest in infrastructure
orders."

But investment alone is not powering China's economic boom.
Retail sales soared 13.2% in the second quarter.

We would also note that the price action in nearly every
one of the world's major commodities refutes the notion of
a slowing Chinese economy. The prices of copper, iron ore,
coal and oil are all hovering near all-time highs.

Copper inventories on the London Metal Exchange have
dropped 45 percent this year, down to their lowest level in
31 years. Somebody must be buying this stuff.

And as the newly revalued yuan gradually appreciates,
Chinese demand for natural resources may increase even
more.

Yesterday's yuan revaluation contains more symbolism than
substance. The initial change adds slightly more than two
percent to the yuan's value against the dollar. But
currencies in motion tend to continue in motion, even when
they are "managed."

So the odds seem pretty good that the yuan will continue to
strengthen over the months ahead, a trend that should
benefit the world's resource companies at the margin. Even
with their undervalued currency, the Chinese had become
voracious buyers of commodities. A strengthening currency,
therefore, should help to boost their commodity consumption
somewhat.

In short, rumors of the commodity bull market's demise may
be as premature as Wall Street's recent "Reduce" ratings.

[Ed. Note: One bull that has certainly been charging of
late is our very own commodity expert, Kevin Kerr. As his
followers can attest, the resource market has be very kind
lately...if you know where to look. Find out here:

Resource Trader Alert

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Did You Notice...?
By Eric J Fry

Many of the same investors who failed to anticipate the
bull market in energy stocks now denounce it as a "mania."
But if it is a mania, it is an embarrassment to all other
manias - past and present. It lacks none of the
distinguishing characteristics: The words, "oil stock" and
"sure thing" do not yet land in the same sentences at
cocktail parties. Nor is Time Magazine running cover
stories about "The New Generation of Oil Billionaires."

Meanwhile, the oil stock sector exhibits none of the
classic "mania" attributes: No crazy valuations; no
parabolic price charts.

The nearby chart overlays the price performances of two oil
stock indices since 1998 onto the Nasdaq Composite's price
performance since the end of 1990. All three indices
advanced to the upside, but the similarities end there.

Canadian Oil stocks, for example, (as measured by the
S&P/TSX Oil & Gas and Combustible Fuels Index) have
advanced about 400% since 1998, in the process following
very closely in the footsteps of the Nasdaq eight years
earlier. But the Nasdaq gained 1200% before finally calling
it quits. If Canadian oil stocks are to become a mania,
therefore, they have only completed one third of the
mission.

Meanwhile, the XOI Index of US oil stocks has barely
doubled since 1998. For perspective, the S&P Homebuilders
Index has quadrupled over the same time-frame. What's more,
the XOI Index still sports a P/E ratio that is barely into
double digits. At 11 times earnings, the group hardly seems
mania-like.

In short, if the bull market in oil stocks is a mania, it
is but a teenager, not an octogenarian.

[Ed. Note: A market that does seem to be giving the term
'mania' a good nudge is the housing market. It's all well
and fine to profit of the upswing, but what about
protecting yourself when the tables turn? Stay informed
here:

Strategic Investments