A Contrarian Take on Junior Resource Stocks

 Things have gone from bad to worse in the junior resource stock sector...

 

Regular readers know we keep close tabs on the junior resource sector. It's one of the biggest "boom and bust" areas of the market. Get into the booms early and avoid the busts, and you can make a lot of money in these stocks.

 

We like to track the junior resource sector with the S&P/TSX Venture Index. You can think of it as the "Dow Industrials of small resource stocks." As you can see from the chart below, this index skyrocketed off its 2008-2009 crisis lows.

 

But since early 2011, it's been all bust... The index is down 62% from its 2011 high...

 

 

Any contrarian needs to have this sector on his radar. A bust this big always creates great values.

 

But make sure to note the far-right side of the chart. You'll see that the Venture Index just broke through to a fresh multiyear low. This sector is still a market in free fall. As the saying goes, it's dangerous to catch a falling knife.

 

Again, a massive decline like this always creates extremely negative sentiment and great bargains. But a speculative sector like junior resources can fall farther than anyone expects. That's why it makes sense to keep this sector on the radar... but wait until the market bottoms, and even shows signs of an uptrend, before committing big money.

 

 Speaking of resource stocks...

 

Many folks buy resource stocks and their underlying commodities with the idea that they are hedging themselves against inflation. And this strategy often works...

 

But you should also keep in mind that elite, blue-chip stocks are a terrific inflation hedge... probably even better than gold. Porter Stansberry has covered this idea here and here.

 

To show you how this idea is working, see our "performance chart" below. It plots the past four years' performance of blue chips Hershey (blue line) and Coca-Cola (red line) versus gold (gold line).

 

 

Once you account for dividends, Hershey has returned 168% in this time frame. Coke has returned 106%. Gold, which pays no dividends, is up 58%.

 

So, sure, gold has advanced as people have flocked to it as a store of wealth. But elite blue-chip stocks have done even better... with much less volatility.

 

– Brian Hunt