Editor's note: Natural resource stocks have gotten crushed. And Extreme Value editor Dan Ferris couldn't be more pleased...
Today's weekend Masters Series essay was originally published in the January 29 edition of our free DailyWealth e-letter. In it, Dan explains why the bear market in natural resource stocks is actually a good thing...
Why Bad News for Resource Stocks Is Good News for You
By Dan Ferris, editor, Extreme Value
Warren Buffett has often said: "Bad news is the friend of the long-term investor."
Bad news leads to lower stock prices. Without low stock prices, it's basically impossible to use the stock market to make a fortune.
You must buy low and sell high. But the only way you can buy low is to buy stocks when they're cheap enough. That usually requires some bad news to come out about the company you're looking at or the industry it's in.
When the rest of the world is selling stocks in a panic, great investors are calmly scooping up bargains amid the chaos.
Great investors were buying in 2009, after the market had fallen almost 60% from its October 2007 peak. Great investors were buying in late 2011, when the market was down 20% from its May 2011 highs.
Today, great investors are buying natural resource stocks... and looking for other resource-related opportunities in anticipation of a great buying opportunity.
Let me explain...
Bad news is all around, especially among commodity-related businesses.
Take iron ore, for example. Iron ore prices are near multiyear lows, around $52 per tonne. At that price, more than a third of global iron ore producers are losing money.
High-cost producers are feeling the pain. Cliffs Natural Resources (CLF) shut down both of its Canadian iron ore mines (with costs at more than $70 per tonne). One of them, the Bloom Lake mine in Quebec, just announced that it's seeking protection under the Canadian Companies' Creditors Arrangement Act (like bankruptcy in the U.S.), just one day after Cliffs eliminated its dividend payment. Steel producer U.S. Steel sought the same protection in September 2014.
Copper prices are near six-year lows, too – under $2.50 per pound...
With such a drastic move, it's little surprise that the biggest U.S. copper miner, Freeport-McMoRan, cut its 2015 capital budget again, this time from $7.5 billion to $6 billion, having already cut it from $9.5 billion.
So, why is all this bad news so wonderful?
Because bad news makes great stocks cheap. Great investors can take advantage of these "bad news" opportunities because they know what stocks they'd like to own before the market falls.
For example, we recently recommended a fantastic royalty stock in my Extreme Value newsletter...
I can't tell you the name out of fairness to my subscribers. But this royalty stock hasn't been this cheap in nearly six years. And it's a royalty on one of the best-run mines in the world, which has another 50 years' worth of metal in the ground today. So it'll be paying out cash to shareholders for a long, long time.
It's insanely rare to get a royalty this good at a price this cheap. But we were ready for it. We knew this stock was out there, and we just waited until it got cheap enough. Now Extreme Value readers who buy it should enjoy a 9%-10% yield for years to come...
Wouldn't it be great if you knew which stocks to buy every time the stock market went down a lot? Other people would be panicking. But you'd be buying with confidence, knowing you're getting shares of a financially solid company with a great business that will survive downturns, keep growing, and that will take off when the market comes back (which it always does).
That's exactly what you should be training yourself to do today.
I can't know exactly when iron ore, copper, or other natural resource stocks will start rising again, but I suspect that it will be sometime this year. Right now, many solid resource businesses are trading at their lowest prices since the financial crisis, more than five years ago.
Investors who can look past the bad news today and single out great resource businesses selling at great prices have an incredible opportunity to make a lot of money over the next few years.
These investors, like my Extreme Value readers, will be better prepared when stocks turn down (as they always do eventually) and some of the richest when they turn back up (which they always do eventually).
Good investing,
Dan Ferris
Editor's note: Despite the bear market in commodities, Dan has found an anomaly in the natural resource market that could lead to 500%-plus gains over the next few years... with minimal downside.
When the cyclical commodities market reverses course and heads higher, this company's share price should EXPLODE higher. As Dan explained, "If I had to pick just one stock to put all my money into… this would be it." If you know Dan, you know he doesn't say take those statements lightly. Get the rest of the details here.