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Because of a lack of technology companies, finding huge winners on the FTSE 100 isn’t so easy these days. It’s true that tech titans like Nvidia, Tesla, or Palantir have been some of the best-performing stocks in recent years. But it’s also true that the industries more commonly found on the Footsie can be great stocks to buy too.
Mining is one of those ‘dinosaur’ industries the FTSE 100 is known for. Many of the big miners haven’t done so well of late, partly because of the prices of certain metals. One metal, however, has been going great guns and that is the yellow stuff. Gold is up 43% in the last year.
Recent FTSE 100 entrant Fresnillo (LSE: FRES) operates several gold mines in South America. Consequently, the stock has surged 260% since the new year. A £10,000 stake would have turned into £35,966 in double quick time.
All that glitters
So what is the investment case here? Buy the stock and hope gold keeps rising? It’s certainly an important consideration given how difficult it is to detach the importance of the gold price from the stock.
Gold and silver (which Fresnillo also mines) are classic safe-haven assets. Few assets throughout history have stood the test of time quite like it. A Roman denarius isn’t worth much these days except to coin collectors. But gold from Roman times would have (to some degree) kept pace with inflation over the millenia.
With goverments like the UK and US at eye-watering debt levels, ballooning deficits, and no spending cuts on the horizon, it’s hard not to see an inflation-filled future. That could be an attractive long term support for Fresnillo stock. There is the added advantage that buying stock through a broker doesn’t have the physical security issues that anyone buying the metal would face.
A buy?
The stock currently trades at 50 times earnings and 24 times forward earnings. The huge difference in profits between last year and (forecasts for) the next is largely down to the effect of a higher gold price. And yet, this isn’t a cheap stock on this metric.
Some call that 15 times earnings fair value for a stock. The FTSE 100 average is roughly 16. That Fresnillo is so much higher than both implies strong growth prospects. In other words, there is a premium on the price expected from profits going up in the future.
All in all, there is an opportunity here. An investor looking for a hedge would do well to consider adding this stock to their portfolio. Given the rather precarious nature of the world’s finances, I’ve added the stock to my watchlist and will be watching with interest. I may open my own position in the near future, too.
