ABX Barrick Gold Corp. (BC) (delisted)

On April 1st, I wrote an article for TheStreet.com titled "Fool’s Gold," where I reiterated a favorite argument and trade idea from the past year about taking short positions, or selling calls, on the Market Vectors Gold Miners ETF (GDX) as its momentum slowed vs. gold itself.

My rationale was that GDX would not track the performance of SPDR Gold Trust Shares (GLD) because many of the big miners which comprised it were underwater from past gold hedging sales at much lower prices and thus not reaping all the benefits of the yellow metal above $1,400.

Since then, GDX has underperformed GLD by over 18%, with GLD rising roughly from $139 to $149 (+7%) and GDX dropping from $60 to $53 (-11.6%). What, or who, drove the miner basket to underperform as its precious surged to new all-time highs above $1,500 this quarter?

Primarily, the three amigos at the top, that's who. Barrick Gold (ABX), Goldcorp (GG), and Newmont Mining (NEM) comprise 35% of the ETF's assets. Does that mean there are no good mining stocks worth your investment dollars?

Not if you know how to use the Zacks Rank to sift the good stuff from the fool's gold. The three amigos mentioned all carry a Zacks #3 Rank (hold) and have done so for many months. This means that there was nothing meaningful in their earnings visibility that caused analysts to get excited about their prospects even as gold surged.

Seeking a Gold Miner Worth Its Weight

In the Zacks Industry Rank, gold miners take the 178th slot with 32 companies currently. This puts the gold miners, as a group and based on their earnings estimate revisions, just into the bottom third of over 260 industries. Not good company to be in, since we try to avoid positions in these areas.

Of the 32 companies, none possess a #1 Rank (strong buy). And only two earn a #2 Rank (buy), Gold Fields Limited-ADR (GFI) and Midway Gold (MDW). Gold Fields Limited is one of the world's largest unhedged gold producers with operating mines in South Africa, Ghana, and Australia. The $11.85 billion company is expected to earn $1.32 this year and $1.76 in 2012, which would represent 59% and 33% year-over-year EPS growth respectively.

From the looks of things today, finding a good gold stock to trade is no easy task. The clear task then is to keep an eye on the Zacks Rank changes and look for miners that get bumped up to a #1 or #2 position.

Does Silver Pullback Shine for This #1 Stock?

As silver consolidates in the mid-$30's after its parabolic run above $48, one silver miner stands out as a Zacks #1 Rank. Pan American Silver Corp. (PAAS) is focused exclusively on silver mining. According to the company, PAAS is founded upon a single mission, to become the best vehicle for equity investors wanting to gain real exposure to higher silver prices.

To accomplish this they are striving to increase their low-cost silver production, to have the most successful silver exploration programs, to hold the largest silver reserves and resources, and to be the purest of the world's large silver producers. They are expected to earn $3.00 this year, which equates to 65% EPS growth, and this is likely why they received enough upward estimate revisions to consistently earn a Zacks #1 or #2 Rank since late April.

Unfortunately, the stock price has only suffered during this time, dropping from $38 to $28. The chart isn't looking so great either, as the stock takes out the year lows just above $30 and the 50 and 200-day moving averages get ready to make the bearish "death cross."

While the forward valuation below 10 times looks compelling, investors should keep in mind that 2012 estimates flatten out to $3.10. This could bring the Zacks Rank back down. In the short run, though, this could be a buying opportunity near the $28 level where the stock first broke out last fall.

The bottom line is that just because the underlying metals are in strong bull markets, this does not make many miners buy candidates. You have to pick and sift carefully among the rubble. And the Zacks Rank is a good first screen to alert you to earnings trends and momentum -- either up or down -- that institutional traders are using for their decision criteria.

Kevin Cook is a Senior Stock Strategist for Zacks.com
 
BARRICK GOLD CP (ABX): Free Stock Analysis Report
 
NEWMONT MINING (NEM): Free Stock Analysis Report
 
PAN AMER SILVER (PAAS): Free Stock Analysis Report
 
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