Digging Up Gold

Steve McDonald
by Steve McDonald, Bond Strategist, The Oxford Club

Gold miners have taken a beating this year, and Barrick (NYSE: ABX) may be one of the biggest losers, so far.

The company has never been known for managing its cash or resources well or, for that matter, being investor friendly. It has a history of being too aggressive in its growth efforts and having too many underperforming assets that are too spread out.

But Barrick is not alone in this category. The whole industry is known for the same wild expansion moves, being unable to translate high gold prices into returns and just bad management.

That is all changing at Barrick. The new CEO was quoted in a recent Barron’s article saying the company has gotten the message and will be more investor oriented, more disciplined in capital spending, and more focused on cost control, return on investment and free cash flow.

That alone is great news, but analysts feel this stock could run up as high as $44 a share from its current $17.50 if all the company does is sell off its projects outside of the Americas and focus on its production there.

It makes sense when you consider that 60% of its production is from its six mines in the Americas.

But a more likely scenario for Barrick’s future was suggested by an Indiana firm, Two Fish Management - an activist investor.

This type of situation where a company has tons of assets, has a history of ignoring stockholders and is grossly underperforming is the perfect setup for a Carl Ichan or some other activist who will force changes that will benefit shareholders.

And as we have seen many times before, just the mention of an activist on the board will drive the stock price.

Barrick’s forward P/E is only 7.7, and it is trading just a few dollars above its 52-week low. Even non-gold bugs have to see the potential in this one.

This is definitely a contrarian play, but one that could be a huge moneymaker.

A Cheap Cloud Play

Based on what has been described as maniacal cost-cutting and restructuring, Computer Sciences Corp. (NYSE: CSC) has run up 57% in one year and could gain another 25% in just the next year.

The company is slashing corporate overhead, cutting management layers and consolidating functions like human resources and purchasing.

The cost-cutting efforts were estimated to be in the $1 billion to $1.2 billion range, but that was recently raised to $1.3 billion.

They are refocusing their business around cloud computing, cybersecurity and big data to rekindle sales growth. This change would require very little additional cash, and analysts feel free cash flow could rise to 100% of earnings.

And the members of the new management team - CEO Mike Lawrie and CFO Paul Saleh - each have long histories of selling dud assets to increase shareholder value and have had great turnaround successes at Honeywell and Gannett.

Earnings are expected to run up 26% this year and 23% for the next two years on a 3% increase in sales.

And the company was recently ranked second, right behind the cloud leader Amazon, in completeness of vision and ability to execute.

The forward P/E is only 12.45 compared to an industry average of around 17, and earnings are expected to jump 15.25% next year.

Computer Sciences is a leaner, more cloud- and data security-focused company whose future earnings and new innovative style will drive this stock.

This is one you have to watch.

The “Slap in the Face” Award

And last, but always first in your minds, I know, theSlap in the Face” Award.

In fact, a political slap in the face award this week. It goes to the president’s nominee for the Federal Energy Regulatory Commission, Ron Binz.

Natural gas is the energy savior of this country, but not if Mr. Binz has anything to do with it.

The huge reserves we have in the Bakken, Utica, Eagle Ford and Marcellus shale areas could make us energy independent by 2020 and reverse the industrial decline we have seen here at home over the past 40 years.

But the president’s nominee stated recently at an Edison Foundation panel that natural gas is a dead end. Quote: “dead end!”

A dead end not because there isn’t enough shale gas to fuel the U.S. for the next 100 years, not because we are paying about a third of what the rest of the world is paying for gas, but because it does not meet his and the president’s schedule for carbon emission reduction standards.

Mr. Binz’s idea to power America: solar and wind only!

According to him, these will save the day because he will make carbon fuels, like natural gas, too expensive!

He expects solar and wind to be 80% of the energy used by this country.

The journal says this is possible only if you assume wildly unrealistic estimates put out by the National Renewable Energy Laboratories. Even they say it is only theoretically possible.

Theoretically possible! We can heat our homes or drive industry on a theory?

A few years ago when the idea of shale gas was just getting started, I said then the government will find some way to screw this up, but I thought they’d tax it to death. Declaring it dead because of some pie-in-the-sky estimates about solar and wind isn’t a slap in the face, it is a disgrace.

Where does Obama find these people?

I wonder if Mr. Binz has ever had to worry about being able to afford to heat his home in the winter or keep a factory open because of rising energy costs.

These folks should have done something other than pronounce policy before they got into government. Maybe a job that is in jeopardy because of rising energy costs.

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