The Market Oracle (UK)
Gold miners have to be the most hated sector in the markets these days. At best they’ve been forgotten as the hyper-complacent general stock markets continue to inexplicably levitate. At worst they’re utterly despised. But the breathtaking bearishness choking them has left gold stocks incredibly cheap relative to their profits. This is a dream come true for battle-hardened contrarians who really want to buy low.
Valuations are the fundamental heart of stock investing, ultimately driving the vast majority of long-term performance. Investors buy stocks because they want stakes in companies’ future profits streams. The less they pay for each dollar of future profits, the better their ultimate returns. Valuations measure how much profits cost today. The price of future profits is also a direct function of prevailing stock prices.
A company with a P/E of 30x is said to be trading at “thirty times earnings”. Investors buying this stock have to pay $30 for each $1 of profits. But all dollars are fungible, right? A dollar of earnings in stock XYZ is no better or worse than a dollar in stock ABC. So why not look for stocks with lower P/E ratios, like 20x or 10x? Why pay more for profits than you have to? Paying too much radically lowers future returns.