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Gold stocks, on the other hand, have been a different story. Their performance lagged the overall market in 2012 and was one of the reasons why Canadian stocks did so poorly last year. This was despite the fact that gold bullion prices rose 7% and silver prices gained over 9%. The chart below shows the ratio of the TSX Gold and Silver index to the price of gold bullion. What is readily apparent is that gold stocks have lagged the price of gold dramatically over the past few years and are now at the lowest relative valuation to gold on record, even lower than at the market bottom seen in 2009.
Much of this underperformance was due to a huge shift by investors into the Gold ETF and away from stocks. This took the mining risk out of the equation and allowed investors to play the commodity directly, which was probably a good thing since higher mining, exploration and related costs caused mining profits to grow at a much slower rate than the price of gold itself. But the valuations have now fallen to the point where it is becoming cheaper for the gold companies to buy one another than to put a drill in the ground. This is leading to an increase in corporate activity in the gold stocks that should put a floor under the stock prices, even if gold itself slips a bit further in the short-term.
The bottom line here is that we think that gold might experience a correction in the near term given fears about the end of central bank easing and the fact that gold has been in a bull market for over 10 years. But the core trend is towards easing and weakness in most of the key global currencies (Yen, Euro and U.S. Dollar), so we think the bull market in gold is far from over and the stocks represent a cheaper way to play this than they ever have. It might not be the winning strategy to start 2013, but we think that there is still a lot of return left in the gold stocks. In the seniors we favour Goldcorp and Kinross, while in the mid-cap area we like NewGold, B2Gold and Osisko Mining.
Technology stocks did well in 2012, thanks in no small part to the continued strength of Apple, which gained over 31%. However the stock did finish the year more than 23% below the peak of over US$700 per share seen in October. As the stock was falling from its peak, investors openly worried that the best part of Apple’s growth was behind it; Steve Jobs was no longer around, other tablets were making strong inroads into the iPad market share and the Samsung Android-based phones had taken the lead in global smart-phone sales. Investors started to see another Palm or HP or RIM developing in the world of Apple, which almost every portfolio held a position in due to its great performance over the past five years.
Although we have also been bullish on Apple, we did take some profits around the US$700 level. We added the stock back in the mid 500’s as we believe that there still remains momentum in the growth of the business over the next few years and the valuation is exceptionally attractive, even assuming a slowdown in growth. Tablets continue to take market share from desktop and laptop computers while smart-phones dominate the growth in the cellular market; Apple remains well-positioned in both markets. More importantly, iTunes remains a proprietary software that is still the ‘go-to’ site for music and video downloads that can go immediately to the devices. Moreover, Apple has migrated its offering to the web effectively with its ‘iCloud’ services. At US$550, the stock has a market capitalization of around US$550 billion, but also has net cash on the balance sheet of over US$120 billion. Net of the cash, the stock is trading at about 9 times current earnings, well below the average market multiple and an extremely attractive level for a company that still has built-in growth for at least the next 3 years. Ultimately the company will have to re-invent itself once again to maintain market dominance. But the market position and growth of its core product offering pushes that timeline out for now.