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A Contrarian Take on Junior Resource Stocks

By Brian Hunt, Editor in Chief, Stansberry & Associates
Monday, April 22, 2013

 Things have gone from bad to worse in the junior resource stock sector...
 
Regular readers know we keep close tabs on the junior resource sector. It's one of the biggest "boom and bust" areas of the market. Get into the booms early and avoid the busts, and you can make a lot of money in these stocks.
 
We like to track the junior resource sector with the S&P/TSX Venture Index. You can think of it as the "Dow Industrials of small resource stocks." As you can see from the chart below, this index skyrocketed off its 2008-2009 crisis lows.
 
But since early 2011, it's been all bust... The index is down 62% from its 2011 high...
 
Toronto Venture Exchange Index Value, 2007-2013
 
Any contrarian needs to have this sector on his radar. A bust this big always creates great values.
 
But make sure to note the far-right side of the chart. You'll see that the Venture Index just broke through to a fresh multiyear low. This sector is still a market in free fall. As the saying goes, it's dangerous to catch a falling knife.
 
Again, a massive decline like this always creates extremely negative sentiment and great bargains. But a speculative sector like junior resources can fall farther than anyone expects. That's why it makes sense to keep this sector on the radar... but wait until the market bottoms, and even shows signs of an uptrend, before committing big money.
 
 Speaking of resource stocks...
 
Many folks buy resource stocks and their underlying commodities with the idea that they are hedging themselves against inflation. And this strategy often works...
 
But you should also keep in mind that elite, blue-chip stocks are a terrific inflation hedge... probably even better than gold. Porter Stansberry has covered this idea here and here.
 
To show you how this idea is working, see our "performance chart" below. It plots the past four years' performance of blue chips Hershey (blue line) and Coca-Cola (red line) versus gold (gold line).
 
Price of Gold, Coca-Cola, and Hershey, Percentage Change, 2010-2013
 
Once you account for dividends, Hershey has returned 168% in this time frame. Coke has returned 106%. Gold, which pays no dividends, is up 58%.
 
So, sure, gold has advanced as people have flocked to it as a store of wealth. But elite blue-chip stocks have done even better... with much less volatility.
 
– Brian Hunt




Further Reading:

Read more from Porter on elite blue-chip businesses here:
 
The Single Greatest Investment Secret Ever Discovered
"Always remember... Capitalism is about capital – how much you earn and how much you keep."
 
Two Dangerous Mistakes Smart Long-Term Investors Often Make
"Extremely capital-efficient companies can generate massive returns for patient, long-term investors. But as you're looking for these companies, you must keep two incredibly important risks in mind..."
 
The Best Investment Advice You'll Never Take
"I believe most investors think this strategy is simply too boring... or too good to be true."

In The Daily Crux
Market Notes
Natural gas prices are up 31% so far in 2013.
 
Biotech index NBI soars to a new all-time high... up 41% in the past 12 months.
 
Slow and steady utility uptrend continues... sector fund XLU breaks out to a fresh four-year high.
 
Select tech names shift into a downtrend... EMC, Teradata, F5 Networks, and Tibco Software break out to 52-week lows.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1555.25 +0.9% +13.0%
Oil (USO) 31.39 -0.8% -19.4%
Gold (GLD) 135.47 +0.9% -15.0%
Silver (SLV) 22.40 +0.0% -27.3%
U.S. Dollar 82.74 +0.2% +4.0%
Euro 1.31 +0.4% -0.3%
Volatility (^VIX) 14.97 -14.8% -18.5%
Gold Stocks (^HUI) 268.41 +1.6% -39.9%
10-Year Yield 1.70 +1.2% -12.8%

World ETFs
Symbol Price
Change
52-Wk
Japan (EWJ) 11.34 +1.1% +19.1%
USA (SPY) 155.48 +0.9% +15.4%
Singapore (EWS) 13.95 +0.5% +13.5%
Taiwan (EWT) 13.54 +2.9% +7.2%
India (IFN) 20.75 +0.9% +6.7%
Israel (ISL) 14.20 +1.2% +5.1%
China (FXI) 36.05 +3.2% -2.0%
Canada (EWC) 26.69 +0.6% -2.0%
S. Africa (EZA) 61.40 +1.3% -4.7%
S. Korea (EWY) 55.24 +0.8% -5.3%
Lat.America (ILF) 42.08 +1.1% -5.4%
Russia (TRF) 13.93 +0.1% -12.1%

Sector ETFs
Symbol Price
Change
52-Wk
Construction (PKB) 18.66 +1.6% +37.5%
Media (PBS) 19.60 +2.1% +34.4%
Health Care (IYH) 100.11 +2.0% +31.9%
Biotech (PBE) 27.86 +3.6% +28.5%
Telecom (IYZ) 26.07 +1.6% +24.6%
Consumer Svcs (IYC) 98.31 +1.3% +23.7%
Utilities (XLU) 40.73 +1.5% +22.2%
Real Estate (IYR) 71.86 +1.2% +20.6%
Financials (IYF) 67.36 +1.4% +20.3%
Insurance (PIC) 19.01 +0.1% +18.3%
Water (PHO) 21.49 +0.4% +17.0%
Defense (PPA) 22.43 +1.7% +16.9%
Transportation (IYT) 107.44 +1.6% +16.7%
Industrials (IYJ) 78.67 +0.5% +14.9%
Retail (PMR) 28.15 +1.5% +12.4%
Software (PSJ) 28.59 +0.3% +8.6%
Nanotech (PXN) 6.47 +0.6% +6.3%
Big Tech (QQQQ) 68.09 +1.4% +4.7%
Basic Mat (IYM) 66.68 +1.2% -2.3%
Semis (PSI) 14.41 -1.2% -6.3%
Alt. Energy (PBW) 4.29 +1.9% -13.4%

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