2 Gold Stocks with the Midas Touch this Earnings Season

After taking a beating from the stronger greenback last month, gold has regained its shine as investors flocked to the safe haven metal amid gloomy economic data and a turbulent stock market.

Gold spiked to a one month high on Oct 15 on the back of a huge sell-off in equity markets following the release of three major disappointing US data. U.S. retail sales fell 0.3% last month signaling some caution on the part of consumers, the producer price index was down 0.1% — the first decline in more than a year. Additionally, reading for the Empire State Manufacturing Survey skydived to a reading of 6.2 in October from a robust 27.5 in September, signaling that business activity is slowing down for New York manufacturers.

Moreover, dour economic reports from the European Union, particularly its leading economy Germany, raised concerns about global growth and increased volatility in the markets, helping the cause of gold. German exports plunged 5.8% in August, registering its biggest drop since early 2009. Germany’s Industrial production and factory orders data were also disappointing. China’s consumer inflation slowed, more than expected, to 1.6 in September — a near five-year low, which is the latest sign of weakness in the world’s second-largest economy.

Moreover, decline in oil prices dragged down stocks. The Dow suffered its biggest point decline in over a year, while the S&P 500 registered its biggest percentage decline in six months. Gold prices have thus revived from the nine month lows witnessed in September thanks to lower equity prices, U.S Treasury yields and the U.S. dollar. The spreading Ebola crisis also attracted buyers.

Strong physical buying in India due to the festive and wedding season will continue to support gold prices. Gold has entered a seasonally strong period and demand is expected to pick up with the Diwali festival in India, Thanksgiving and Christmas in the U.S. and the Chinese Lunar New Year being around the corner. Even though, gold is still under the ominous threat of higher interest rates, currently its appeal as a safe haven investment amid the worries about global economic growth has overruled those concerns.

As per the Zacks classification, the gold-mining industry comes under the broader Basic Materials sector. Until now 14.3% of the stocks in the sector have reported their numbers for the third quarter. Year over Year earnings for the sector increased 180.4%, and the Basic Materials sector has an impressive beat ratio (percentage of companies coming out with positive surprises) of 66.7% so far.

However, it is too early to be anxious about the numbers. Taking into account the other companies that are yet to report their results, earnings of the Basic Material sector is expected to go up 10.2% for the third quarter, up from the 8.6% increase in the second quarter of 2014. Currently, the sector is expected to witness a 3.8% rise in earnings in the fourth quarter, and 15.3% in Q1 2015. Overall, in 2014, the sector will log earnings growth of 8.7%, somewhat pulled down by decline in the first quarter. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)

At the onset of the third quarter earnings, it is wise to bet on companies that have the potential to beat earnings in their upcoming releases. An earnings beat backed by the strong growth outlook for the sector would reinstate investor confidence in the stocks leading to immediate price appreciation. 

How to Make a Choice?

With a number of players circulating the industry, picking the right stocks might appear to be a daunting task. However, the Zacks proprietary methodology makes it easier. One can narrow down the list with the potent combination of a favorable Zacks Rank - Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) — and a positive Earnings ESP.

Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. It helps in determining stocks that have high chances of delivering earnings surprises in their next earnings announcement. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Here are two gold stocks that are likely to surprise this earnings season, as they have this compelling combination:

Allied Nevada Gold Corp. ( ANV )

Headquartered in Reno, NV, Allied Nevada Gold Fortuna Silver Mines is a gold mining and exploration company which operates through its wholly owned Hycroft Mine, an open pit heap leach operation located to the west of Winnemucca, NV. Its other properties include Maverick Springs, Mountain View, Wildcat and Pony Creek/Elliot Dome. 

This Zacks Rank #2 stock has an earnings ESP of 40% for the third quarter. With a positive surprise of 28.57% last quarter, the company has delivered positive earnings surprises in 2 of the last 4 quarters. The Zacks Consensus Estimate has moved northward by 3 cents for the third quarter as well as for 2014 over the last 30 days.

Ahead of its earnings release, Allied Nevada Gold reported that its third quarter 2014 production and sales targets were achieved at the Hycroft mine. The company has produced 49,630 ounces of gold and sold 52,176 ounces in the third quarter. The Hycroft mine continues to benefit from increased mining capacity and process improvements that have been implemented to the heap leach operation over the last few years. In the first nine month period of 2014, gold sales rose 39% higher year over year, thanks to the increased processing capacity of the new Merrill-Crowe plant. The company is currently mining in higher grade material and expect to average mined grades of 0.017 ounces per ton of gold for the fourth quarter and gold sales for 2014 to be in the range of 220,000-230,000 ounces.

The Hycroft project is one of the only economic, permitted large projects in the gold space today and has the potential to become a significant, low-cost producer with a long reserve life and large open resource. Allied Nevada Gold recently provided feasibility study results of the Hycroft mill expansion with IRR projected to be 28.6% and NPV projected to be $1.81 billion at a discount rate of 5% (assuming gold and silver prices of $1,300 per ounce and $21.67 per ounce, respectively). 

Allied Nevada Gold Corp. is slated to report its third-quarter results after the market closes on Nov 3.

Headquartered in Vancouver, Canada, Goldcorp is a leading gold producer engaged in gold mining and related activities including exploration, extraction, processing and reclamation. Goldcorp has its operations in Canada, the U.S. Mexico and Central and South America. Its main mining properties are Red Lake, Porcupine and Musselwhite gold mines in Canada; the Wharf gold mine in the U.S.; the Pueblo Viejo mine (40% interest) in the Dominican Republic; the Penasquito gold/silver/zinc/lead mine, and Los Filos and El Sauzal gold mines in Mexico; the Marlin gold/silver mine in Guatemala; and the Alumbrera gold/copper mine (37.5% interest) in Argentina.

This Zacks Rank #3 stock has delivered a year-to-date return of 11.22%, outperforming the S&P 500 return of 2.4%. The company with a market capitalization of $19.3 billion has a long-term expected earnings growth rate of 12.8%. The Zacks Consensus Estimate for the third quarter is pegged at 19 cents with an Earnings ESP of +5.26%. The Zacks Consensus Estimate has moved up 6% over the last 30 days. The company has delivered positive earnings surprises in 3 of the last 4 quarters, with an average beat of 8.16%.

Goldcorp’s growth drivers lie in its vast array of development and exploration projects, with an impressive line-up of such projects. The company expects gold production to rise year over year in 2014 even after excluding the production from the Marigold mine which was divested to Silver Standard Resources Inc. (SSRI). Goldcorp has projected a production target of 2.95 million and 3.10 million ounces for 2014.

The company is actively focused on cost reduction, which should aid in improvement of its results moving ahead. Its all-in sustaining costs are expected to decline in 2014. It now expects all-in sustaining costs to be at the bottom end of its guidance of $950 to $1,000 per gold ounce, reflecting the lower-than-expected costs in first-half 2014. 

Goldcorp will report its third-quarter results before the opening bell on Oct 30.

Moving Forward

Gold prices will continue to get support from demand in Asia during this time of the year. Top bullion consumer China has been importing more gold in September to meet the demand from retailers stocking up for the upcoming National Day holiday. In India, the second largest consumer, gold imports are estimated at 95 tons, driven by the festive season. Moreover, global growth concerns and geopolitical tensions will spur safe-haven buying. A sneak peek at the space for some possible winners backed by a solid Zacks Rank and a positive Earnings ESP could be a great idea for investors to gain from this earnings season. The gold stocks appear to be finally set to provide better returns to investors.

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