Soaring gold prices have gold bugs a-twitter. But how likely are many of these gold stocks to be higher one year from now?
PowerRatings are not just a way of knowing which stocks to buy. Investors can look at the opposite end of the spectrum, the low-rated stocks with PowerRatings of 1, 2, or 3 to see which stocks to avoid.
While a number of gold stocks have done very well since August — stocks like Barrick Gold (NYSE:ABX – News) and Agnico-Eagle Mines (NYSE:AEM – News) — there are a number of gold stocks that are not likely to perform as well. Because some of these stocks may look cheap on a dollar basis, there is a danger that some investors bullish on the prospects for gold will treat stocks like these as if they were lottery tickets rather than taking the time to invest in the better stocks in the group — preferably when those better stocks go on sale and their mostly average PowerRatings increase.
Our research, looking at simulated trades between 1995 and 2006, tells us that the lowest PowerRating stocks, the stocks with PowerRatings of 1, 2, and 3, tend to underperform the average stock — sometimes dramatically so. Consider this: a stock with an average PowerRating like Goldcorp (NYSE:GG – News) with a PowerRating of 5 has tended to be higher one year later 56.2% of the time. A stock with a PowerRating of 2, on the other hand, was higher one year later less than 42% of the time.
A 1-rated stock was even less reliable as an investment. Stocks with PowerRatings of 1 were higher one year later less than 35% of the time.
So if you are looking to buy a gold stock because of the excellent performance of many of the stocks in that group, be sure you are thinking about what you believe the stock will do going forward, not based on what the stock has already done. Investors tend to be more bullish when stocks are at their highs rather than at their lows. This is why using PowerRatings helps, by keeping investors from chasing after high-flying stocks and instead, buying on weakness.
These four gold stocks represent the kind of weakness you do not want to buy. They may be riding the coat-tails of the general move higher in gold stocks. But when the gold stocks correct, these low PowerRatings stocks are not likely to take it nearly as well as their peers.
Seabridge Gold (NYSE:SA – News) PowerRating 2. See chart below.
Golden Star Resources (NYSE:GSS – News) PowerRating 2.
Novagold Resources (NYSE:NG – News) PowerRating 1
Gammon Lake Resources (NYSE:GRS – News) PowerRating 1. See chart below.
