Can there be value in stocks selling at five or ten cents?

There certainly can be value; we get that question all the time. If a gold exploration common stock is selling at pennies, investors ask as to “how can there be any value in that stock?”

The answer is that there can be exceptional value in many stocks selling for near a “nickel” or less. Many exploration companies and “juniors” are remarkably undervalued based on the basis of what they own in mineral reserves and resources as well as later earnings potential basis. Moreover, one can find many companies including junior exploration companies with large cash positions. Suffice it to say, it depends on what a gold company has or can find efficiently.

We should also mention that the major brokerage houses in North America do not want to see a bull market in gold or the commodities markets. History shows that when there is a bull market in commodities at the same time you cannot have a bull market in the industrial stocks such as the Dow Jones Industrials.

Moreover in a commodities bull market, the brokerage industry cannot maintain the same level of profitability that they have during a commodities bear market. Understand full well, that the brokerage industry will fight and is loath to admit when the world is in a commodities bull market. They fight it tooth and nail. A “hard assets” bull market is the last thing that the brokerage industry can accept.

Why are Juniors so overlooked despite being so undervalued?

1-Let’s start with the fact that there is minimal research coverage or sponsorship for “juniors” and limited comprehensive research for most exploration companies. Research coverage is badly needed but is rare.

Fact: Banks and brokerages generally do not cover a company(s) on a research basis if there is not going to be adequate commissions or corporate finance income generated. That is true for any industry or market sector.

If there is no research available on a mining company, most investors generally will not invest in it. They may trade in it short term, but they won’t invest in it.

2-The decline in research coverage has been ongoing for twenty years and continues. For brokerages and banks, financing research departments and hiring analysts is just not profitable.

*Most gold and mining exploration stocks are down on average from 70% to 90% from their market highs. This is a direct result of no research and little if no market maker support. Yet, many of them will come roaring back.

3-Despite the fact that a company is undervalued is not a sufficient reason to attract brokerage and bank research. Moreover, many banks and brokerage houses will not permit their brokers to invest in stocks that are selling at low prices.

4-In the past, market makers (called specialists) working at the brokerage houses would hold in their trading accounts large and small inventories of specific stocks that their brokerage houses followed with comprehensive research reports. They would “make markets” with continuing “bids and offers” for those stocks and often in size. Most importantly, they would buy in their “inventory type accounts” their assigned stocks during declines which provided solid support.

Also at the same time their brokerage clients would be investing in those stocks there would be research updates coming from the research departments.

5-Many exploration stocks have completed extensive drilling programs that in some cases indicate substantial reserves and excellent potential for expanding their resources and reserves. In our view, in this market numerous exploration and mining companies are being overlooked. That will dramatically change when gold moves above $1300-$1400 U.S.

We believe that the bottoming formation in the mining stocks has been ongoing for the past two years. We do not believe that a final major move down in gold, if one occurs at all, will permit a large volume of shares to be available to bottom fishers. We doubt it-to say the least! And if you have found a very undervalued company, it is often better to keep it to yourself.