Goldsmith comment: Yesterday, we started an interview with editor in chief Brian Hunt on the junior resource sector – the tiny stocks that hunt for big resource deposits.
This is a major "boom and bust" sector, as Brian explained. And he's showing us how our new S&A Junior Resource Trader service is spotting the boom cycles, sidestepping the busts, and picking the best companies for taking advantage of what should be a massive uptrend in the resource sector.
Sean Goldsmith: So how do you identify where you are in one of these "boom and bust" commodity cycles?
Brian Hunt: It's both an art and a science.
What I mean is, you can use a variety of tools to identify where you are in the cycle, some more subjective than others. One of them is investor sentiment...
If everyone is going wild for a given commodity, if it's all over the headlines and magazine covers, you're closer to a top than a bottom. This is the "art" part of the analysis. It's hard to place exact figures on investor sentiment toward a given commodity market, although there are people who try to do that.
You also have valuations. If you see big takeovers in a given sector where the larger companies are paying record amounts to gobble up smaller companies, that's also a sign you're closer to a top than a bottom. Big companies should know better than to buy expensive assets, but they make mistakes just like anyone else. They get caught up in the bullish sentiment.
For example, ConocoPhillips famously paid an exorbitant amount of money to take over natural gas producer Burlington Resources back in 2005, right at a huge top in natural gas. It paid over $30 billion to take over Burlington... which was seen as an absurd amount by a lot of energy experts. Then natural gas fell from $14 to $5. You can plug numbers in to run valuation studies for these sorts of things, so that's more science.
We also use basic trend analysis, basic chart studies, to gauge commodity cycles. This is also part art and part science. If you allowed me to just trade off charts for the rest of my life, I could do it. I wouldn't even need to know the name of the commodity or its fundamentals.
I could make money in commodities by buying into markets after they've been crushed but are starting to display the beginnings of uptrends. I could also short massive uptrends that are losing momentum and rolling over. Of course, I'd rather have the full picture, the sentiment and the fundamentals, to help me gauge the trend, but I could use just charts if you made me.
We use a basic moving average indicator in the S&A Junior Resource Trader to identify bull and bear market cycles. Hardcore fundamental investors will scoff at this. But we've tested everything in the commodity market with expensive databases, statisticians, and computers to see what works... and this is what works: blunt moving average tools.
Most of the hardcore fundamental guys regularly get killed in commodities because they just "absolutely know" what the market doesn't, ignore trends, and then get taken out back behind the shed and shot between the eyes.
Lots of supposed geniuses were obliterated in 2008 because they ignored the giant cycle change in mid 2008... and didn't use risk-limiting sell stops. You've got to limit your risk by knowing when to get the hell out of these things when they get overpriced and frothy and show weakness in the charts.
SG: Besides these moving averages, what other tools are you using to get into the right stocks at the right time?
BH: We use a concept master resource investor Rick Rule calls "know who."
Most of the time, a junior resource company is nothing more than a team of managers and geologists, a bank account, and some prospective property leases. For the majority of exploration companies, the firm's most valuable asset is its management. This is where it gets tough for investors... because the resource business is full of managers who are inept, crazy, corrupt, or a mixture of all three.
Thousands of mining company promoters around the world have wonderful stories to tell about how their companies have found incredible gold veins or oil deposits... and how investors are going to make a fortune. Most of them are full of hot air.
What stock promoters don't want you to know is, most resource sectors have maybe 20 or 30 proven and knowledgeable exploration teams. The rest are just too inept or unproven to risk your money with them. It's critical you avoid these companies. They tend to blow up with regularity.
What we do in the S&A Junior Resource Trader is identify the companies that either have proven management teams with a track record of success, or have "up and comers" who are honest and smart. There are thousands of companies to sift through, and less than 10% of them are worth serious study. The rest should be avoided like toxic waste.
Separating the bit of wheat from the chaff in the resource business takes a lot of work... attending conferences, talking with industry insiders, going on site visits, looking over company fundamentals, and talking with management. This is what editor Matt Badiali and his team does. Over the years, we developed a lot of contacts who can help us identify big opportunities. Again, as Rick says, you've got to limit your risk with a healthy amount of "know who," along with "know how."
This aspect of trading the juniors may not sound important to some folks, but it's a huge factor in your success here.
And just as important, readers should have the "know who" about how Stansberry & Associates does business. They should know we never accept any money from junior companies in return for recommending them to our readership. We accept no banking fees, no warrants, no promotional fees, nothing. We answer to our readers and nobody else.
This is not the case with many of the advisories that cover the resource sector. It's a sector rife with backdoor payments, bribes, and bullsh*t artists.
SG: Hasn't Junior Resource Alert editor Matt Badiali used this "know who" strategy to generate some big winners in the past 18 months?
BH: Yes. In addition to minding the big trend, succeeding in the juniors really is about staying in touch with the industry's most knowledgeable insiders and dealmakers. It's about being able to get in touch with the best CEOs and geologists. It's about getting on the road and seeing projects and meeting people. It's about being able to tap the rumor mill and knowing the difference between a pipedream and an actual real project.
Matt did that this year – he minded the trend, tapped his contacts, and performed great analysis – to score a big hit with a tiny exploration firm ATAC Resources, which climbed more than 500% for readers of our early-stage microcap advisory Phase 1 Investor. Phase 1 readers also saw a more than 200% gain with a company named Rainy River. And they are up more than 100% in some other "know who" stocks like Almaden Minerals, AuEx Ventures, and Mirasol Resources. His readers are up more than 350% on Silver Wheaton.
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I know some readers of Matt's S&A Resource Report will send us hate mail about some of these picks not appearing in that letter, so I'll just head them off at the pass right now.
These stocks have microscopic trading liquidity compared to some of the huge winners in the S&A Resource Report, like Silver Wheaton... or other big winners like Silvercorp or Eldorado Gold. Silver Wheaton has a $12 billion market cap. Many juniors are less than 1% of that size. They are the smallest of the small.
You just can't do subscribers of a widely read letter a good service by recommending tiny $30 million companies in it. The buying interest is too large. That's why we created the S&A Junior Resource Trader, to provide our readership with another way to access this market, which we believe could produce incredible returns in the coming years.
SG: Thanks for your time.
BH: You're welcome.
Goldsmith comment: The reader feedback we're already seeing from our resource sector trades is incredible. One "field tester" taking part told us, "[This] is the single best investment I can ever recall making in over 25 years. I've made $28,000 so far and am holding out for more."
Another said, "We've made 350% in 10 months with this gold secret!" To learn the full story on how folks are enjoying these tremendous returns, make sure to watch this short video.