News Analysis date published New: 
Thursday, August 23, 2012 - 06:00
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Thursday, August 23, 2012 - 06:00
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Thursday, August 23, 2012 - 06:00

This $21 Billion Hedge Fund Manager is Buying Precious Metals... Should You Follow His Lead?

Thursday, August 23, 2012 - 6:00am

After someone turns a couple hundred million dollars into billions in a few short years, it seems worthwhile to pay attention to what they do in the future. John Paulson is best known for betting against the housing market in 2006. His fund started with about $150 million, and he delivered gains of more than $20 billion to his investors by the end of 2009.

Paulson then moved into gold, allocating 44% of his $21 billion hedge fund to the sector. And his big position in that market delivered big gains.

Now, Paulson likes gold again. He owns more than $3.3 billion worth of SPDR Gold Shares (NYSE: GLD) and has twice that much invested in mining stocks.
I looked at the charts of the stocks in the mining sector, and I found a company that is a buy based on every indicator I looked at.

In addition to following in the footsteps of this market wizard by focusing on precious metals, this stock has strong momentum, a great chart pattern, and the potential to deliver a gain near 70% if it hits the target price set by Wall Street analysts. From the chart alone, I think this stock can gain about 40% in the near-term.

When multiple indicators confirm a buy signal, it is usually a very bullish situation. That is the case with Silver Standard Resources (Nadsaq: SSRI). Although it's a silver miner rather than gold, there are a number of silver stocks included in the PHLX Gold/Silver Sector Index (XAU).

The chart below shows some of the buy signals on SSRI. Its relative strength is above 70, which is generally considered to be the buy level based on this indicator. At 72, SSRI has outperformed more than 72% of the alternative investments during the past six months.

Moving average convergence divergence (MACD) and stochastics are both positive, and neither is at a level that indicates the stock is overbought. The weekly chart below shows that SSRI has formed a rounding bottom and the price target from that pattern is about $14.97 a share, a gain of 17%. After that, resistance at $17.79 provides the next price target and a gain of almost 40%.

Looking at the fundamentals, there are additional reasons to buy SSRI. The stock is trading near its book value, while other mining companies trade at about 1.4 times their book value. That indicator tells us that SSRI is about 40% undervalued and supports the targets obtained from technical analysis. Analysts who follow the stock for Wall Street firms think that the stock is almost 70% undervalued and have set a 12-month price target of $21.30 a share for SSRI.

The price target is based on earnings that are projected to grow at more than 400% a year over the next five years. That may prove to be optimistic, but given an estimate like that, it seems certain that there will be strong earnings growth.

Optimism is high because SSRI has proven and probable reserves of about 189 million ounces of silver, an amount that is worth more than $5.6 billion at current market prices. With about 80 million shares outstanding, the silver reserves alone are worth about $70 a share, but of course, the share price will be lower than that to account for the costs of bringing the silver to market.

The company's mines produced about 6 million ounces last year, at a cost of about $18 an ounce. With the market price of silver near $30 an ounce now, this is a company with solid profit potential. Gains in silver prices will flow directly to the company's bottom line.

Action to Take -- > SSRI is a trade in a sector one of the world's greatest investors is buying. John Paulson has been right before, and given his track record, he will probably be right again. This trade lets us profit from his favorite sector. I recommend buying SSRI at $13.09 or below with a set stop-loss at $12.06 and an initial price target of $14.97.

This article originally appeared on 3 Indicators and a Market Wizard Are Saying 'Buy This Sector'

Michael J. Carr does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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