Best silver stocks are often searched as one way of silver investing. Most of them are shares of stock mining companies.
I am a proponent of actively managed investments or mid-term trading (position trading) and so I do not recommend long-term timing for silver investing even if you select the best silver companies. It is hard to forecast the long-term development of their share prices.
There are two basic categories to select the best silver stocks. The first one is fundamental analysis and the second one uses technical analysis for selection of best silver stocks.
Fundamental analysis of best silver stocks
I believe that picking best silver stocks among mining companies is a rather difficult exercise and way more difficult than a pure bet on silver itself. As there is minuscule contango on silver (2011), I would advise everyone to stick to proven ETF or futures strategies, unless you really know what you are doing in the equities arena.
However, if you believe that there is no upside to spot prices of silver, yet they will remain at these strong levels over a protracted period of time, and if you possess some valuation skills, you may go ahead and try to beat the market. Do not worry, it is possible. But you must do your homework.
In order to assess the value of a silver mining company, you can either do the easy way (and lousy one) by using market multiples (you would probably use reserve multiples, cash flow multiples, etc.), or do it the hard way and use DCF analysis.
By actually doing DCF analysis and building models, you will have to push yourself into understanding the company inside out and getting a full grasp of fundamental drivers. This involves a work for at least a couple of weeks if you wish to do it properly.
First, you would probably start by estimating volumes of metal that the miner can get out of the ground over your planned period. Get revenues by multiplying volume by price of futures contracts (best estimate).
Further, understand how much reserves there are in the ground and how long the mine reserves will last (understand which of these reserves are proven and which are probable).
Look at the cost structure of your miner – is it located in the bottom left of the curve or in the upper right corner? The miners in the upper right are generally more risky and more susceptible to price swings. Marginal moves of the high-cost producers are equal to high operational leverage. Get a grasp of investment needs of the company.
Finally, take into account the country’s risk in your discount rate (e.g. workers in emerging countries have a strange tendency to strike, demand double-digit wage hikes, governments tend to nationalize, etc.) If the company pays out dividends or tends to give money to shareholders in other ways, decay of the discount rate will benefit you over time and increase the value of your company. Thus you get rewarded even if the futures curve of silver moves exactly nowhere.
But as you can see from all the basic factors of DCF – each company is different – thus, beware of idiosyncratic risks. Make sure you get a basket of good apples.
As you can see, fundamental analysis is quite a hard job. A self directed investor that wants to do fundamental ETF research for his/her portfolio has to prepare a really good methodology to do it well.
Free stock screener of best silver stocks
There is the option to use technical analysis to select best candidates for silver investing. Sometimes it is better just to check the trend and then find the best silver stocks which are trending in same direction. How to select such stocks?
I would use these basic parameters to find them:
- stock must be liquid
- stock has price above 10 USD
- stock must be in the silver sector of course
If you plan to go long on the stock then I would like to evaluate relative strength of these stocks. It should be done visually, but such stock should be above their 50-day moving average and 200-day moving average.
When selling short with these stocks, then I would prefer to short stocks with a price under the 50-day moving average.
A good free stock screener could be used in Amibroker, the best stock analysis software. Or you can use some websites offering good stock screening, like FinViz. But generally a list of all silver stocks is not big and you can evaluate all of them manually. There are 10 companies in this sector available on US stock markets today (08/2011).
The first image shows all companies in this particular sector. The second image is a list of silver stocks with the parameters mentioned above.