By Doug Casey – The Eight Ps of Resource Stock Evaluation
I’ve been asked “What’s the secret of finding winning gold, silver, and other natural resource stocks?” more times than I can even begin to count. And for over 20 years, my answer has remained pretty much the same: the Eight Ps.
The Eight Ps is a relatively simple question-and-answer process we use as part of our due diligence on the stocks we consider for recommendation in our monthly newsletters. Only a small fraction of companies successfully make it through the Eight Ps screening and into the pages of our publications.
As you’ll read, the Eight Ps process is relatively simple and, with a little practice, you, too, can use them to screen any and all resource stocks you are considering for your portfolio. At the very least, answering the questions will give you a much better understanding of the true potential of a company.
The first question you want answered is “Who are the key players involved with the company?” As is the case with all human beings, some are more skilled, more honest and harder working than others. To state the obvious, Boy Scout virtues like honesty, thrift, courage, and diligence are always good traits for your management teams, as are competence, knowledge, experience and, perhaps most importantly, a track record of success.
You can find this information from a variety of sources, starting with management biographies (increasingly available on company web sites), then doing your research by talking with the managers themselves or their investor relations staff. Use a service like Stockwatch.com to research the track record of the companies that the management has been involved with previously (during their tenure, of course)… and don’t hesitate to ask your broker or even competitors what they think about the people in the deal.
Despite being a multi-billion-dollar, global business, the mining and resource industry is actually a pretty small village. If someone is a known snake oil salesman or poseur, chances are good you’ll be able to ferret out that fact with just a couple of phone calls.
In addition to trying to sort out the black hats, a key goal of this exercise is to find out if investors have made money in their past deals. Or, if things didn’t work out too well — mining is a high-risk business, after all — did the company at least make an honest attempt to “do the right thing” for their shareholders? Remember, nothing succeeds like success.
While we are on the topic of People, it is worth noting that there has been a noticeable gentrification of the mining business during the 20-year-long bear market that ended in 2001. Everyone in the business is complaining about the fact that they can’t find qualified mining engineers and exploration geologists because so many have retired or are getting ready to. It is
understandable: it would take a fairly odd engineering school graduate to opt in for what is perceived as a politically incorrect and faltering “Choo-Choo Train” industry, rather than taking their degree down the street to a more lucrative or modern line of business.
As someone who habitually looks for the opportunity embedded in just about any crisis, we use the labor shortage as a useful leading indicator by watching the career moves of the superstar mining pros. The good ones are in such demand that they can work for pretty much any company they want to… and so, as is human nature, gravitate to those projects which they
believe will provide them with the best personal upside.
Conversely, if the good people start to jump ship from a company, it may be a negative indicator. In the final analysis — bet on the winners.
[Though hugely important, “People” is only the first of the 8 Ps the Casey team uses to gauge winning resource stocks. To learn how to put the other seven Ps to good use for your own portfolio, click here to read our FREE Special Report.]