Deep In The Money Calls With Jon Najarian
Going for the Gold with a New Play
Our stock pick for today is Barrick Gold (ABX:NYSE), which has been breaking out of its range and is ready to make new highs.
Barrick is the world's top gold miner, with production on four continents and three properties coming on line in the next four years. It has a diversified base of assets, a strong balance sheet, and low operating costs, making it a blue-chip name in a red-hot sector.
We like gold right now because we believe the precious metal still has more room to the upside. We think the selling last week related to debt concerns at Dubai World will probably end up being a blip on a much longer-term bull market for gold; therefore, Friday's broad market pullback provides a buying opportunity.
Miners such as Barrick are still undervalued relative to the price of bullion. For instance, when gold first rallied to $1,000 per ounce in March 2008, shares of Barrick topped out around $54. Now gold is trading about 12% higher, but Barrick is still trading 21% below its peak. This lag results from the overall stock-market collapse during the intervening period, which still leaves the gold sector undervalued.
Barrick took the gutsy move of buying back its gold hedging contracts in September and October, issuing new debt and shares in what was essentially a leveraged bet that the metal would continue rallying. Even though it caused a one- time charge of $5.7 billion, it turned out to be a smart move because gold prices have rallied by 19% since the move was announced.
Buying back the hedges essentially allows the company to reap the full benefit of the rising spot price. Even though rising gold prices have been all over the news for months, companies don't always benefit because they've already sold future production at lower prices - similar to some farmers who secure deals to sell specific crops even before they have been planted.
Despite an extremely positive long-term outlook, Barrick has stuck to the same expense discipline we've seen across most companies during this recession. In the third quarter, production costs fell by $10 per ounce to $456, mostly due to lower prices for fuel and other key materials. Yet after the quarter ended, management proceeded to cut 80 jobs from its Toronto headquarters to improve profitability.
Barrick also has good growth prospects, with production forecast to grow about 7% in 2010. The company will grow even further as it brings operations on line in Nevada in the first quarter. Additionally, mines in the Dominican Republic and Chile are expected to start running in 2011 and 2013.
Barrick shares had traded over $45 earlier this month, its highest prices since July 2008. Friday's selling pressure resulting from global concerns about Dubai World's debt problems pushed it down to close Friday at $42.54. From this level, we believe the stock is a good value and due for a rebound.
We'd look to buy the April $35 calls (BXJDI) for $9.40 or less in the next three sessions. Once you own them, program a sell order for $2 over the entry price.
We're comfortable with our other existing positions right now. We hope everyone has a profitable day of a trading and a great week.
Regards,
Pete Najarian
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DISCLOSURE: At the time of publication, Pete Najarian held no positions in stocks mentioned.
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11/13/09 - 10:13 AM ESTPete Najarian is the author of TheStreet.com Deep In The Money Calls (the "Product"). Mr. Najarian a professional investor, noted media analyst and speaker, and co-founder of optionMONSTER®.
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| Dow Jones | S&P 500 | NASDAQ | 10-Year Note | |
|---|---|---|---|---|
| 10,471.58 | 1,108.86 | 2,175.81 | 32.75 |
Oil *
78.92
|
|
UP
126.74
|
UP
13.23
|
UP
31.21
|
UP
0.74
|
10 Yr
3.28%
SPDR Gold
117.38
|
|
+1.23%
|
+1.21%
|
+1.46%
|
+2.31%
|
Data delayed 20 minutes |
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