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Weekend Edition

Where we're looking for the next great royalty company
Saturday, June 18, 2011

In his May 2011 issue of True Wealth, Steve Sjuggerud discussed his recommendation of Silver Wheaton, one of his favorite stocks to play a boom in precious metals...
 
True Wealth readers are up 55% on Silver Wheaton since I recommended it just six months ago.
 
The full story is even better... If you'd put $10,000 in Silver Wheaton at its low two and a half years ago, you'd have over $167,000 today.
 
What does Silver Wheaton do to make those kinds of returns?
 
It's incredibly simple, actually...
 
Six months ago in True Wealth, I explained it: "Its 'business' is driving to the bank and cashing royalty checks. When your business is depositing big checks payable to you, it's near impossible to lose money."
 
I called Silver Wheaton "one of the best business models I have ever seen."
 
With gains like that – and a simple business model of collecting royalty checks – wouldn't you like to find another Silver Wheaton?
 
Unlike mining companies, these royalty companies don't have to spend massive amounts of cash to develop deposits. Nor do they explore for deposits. Companies like Silver Wheaton and Royal Gold, as Steve said, simply collect paychecks as the gold mining companies do the hard work. Their most difficult decision is which mines to partner with.
 
We're constantly searching the market for the best precious metals plays – especially royalty companies. But they're difficult to find. Phase 1 editor Frank Curzio recently discovered a new royalty company trading for a little more than $1 a share – dirt-cheap. Shares have little downside (based on the royalty streaming model), and the management team is great.
 
The CEO of this tiny company was once a top executive for one of the largest royalty streaming companies in the world. He left just to start this company. He already raised more than $240 million. The company used the cash to buy into several gold projects, which are already generating huge cash flow for this tiny company.
 
Frank is projecting at least 200% upside for the stock over the next 24 months. That's if gold prices average $1,400 an ounce. If gold prices push higher, the company could easily be a five-bagger. He will be holding a special conference call with the CEO and one of the top gold analysts in the industry on June 21. To learn more about his favorite royalty company, click here...
 
Few investors' newsletters make our "must read" list. But Jeremy Grantham, the highly regarded head of GMO, is one.
 
In Grantham's April letter, he called for a "paradigm shift" in commodity prices...
 
The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.
 
We commented on Grantham's letter on April 26...
 
Jeremy Grantham is a brilliant investor. He correctly called the top of stocks in 2007. And he re-entered the market near the bottom. In addition to excellent fundamental analysis, Grantham also relies on "mean reversion" to form his investment theses. "Mean reversion" simply means things tend to revert to their historical averages.
 
Whether it's market prices, equity valuations, or profit margins... Grantham knows trees don't grow to the sky and the world never comes to an end. For example, Grantham forecast the technology bubble, noting how far from the "mean" technology stock prices had wandered. They must, he posed, return to earth. He was right.
 
But with his most recent investor letter, Jeremy Grantham has left his wheelhouse. Instead of the value investing he's known for, Grantham drones on like a typical Wall Street government shill about Peak Oil, global warming, income redistribution, and the world's need for a strict energy policy. And he says commodity prices have made a "paradigm shift"... Or in other words, high and rising commodity prices are here to stay. They will not revert to the mean. – Sean Goldsmith, April 26, 2011, S&A Digest
 
Since Grantham's call, many commodities – like oil and copper – have corrected. One commodity investment many mainstream finance people are still super-bullish on is agriculture. Corn is up 130% in the past year. Cotton is up 62%. Wheat is up over 75%. And U.S. farmland is selling for record prices...
 
Hedge funds are largely responsible for the increase. According to Grant's Interest Rate Observer, an April 8 farmland auction set a new record of $11,080 an acre in one Iowa county. But farmers dropped out of the bidding at $9,000 an acre. Two hedge funds bid the land up, in $25 increments, to its final price.
 
This love affair with agriculture is a function of a low-interest rate world. Sitting in leather chairs in air-conditioned offices, investors are scrambling to buy farmable land at sub-4% crop yields (near record lows). And then they must pay someone to farm that land, which eats another percent or two. Ask yourself what will happen when these same investors can earn 2%-3% in a bank account.
 
A 3.5% crop yield values first-class farmland around 25 times earnings. Meanwhile, the Market Vectors Agribusiness ETF (MOO) – which consists of agribusiness giants Deere & Co, Potash, and Monsanto, among others – trades for 14 times earnings. But you don't have to pay annual taxes on MOO, you don't have to farm MOO, and you can exit MOO with the click of a button.
 
I e-mailed one of our "farm watchers," editor in chief Brian Hunt, who grew up on a farm in Iowa. He said buying farmland between 2003-2005 – before corn and soybeans skyrocketed – was a great idea. But today, folks are paying far too much money for good land. Many of his friends back home are saying they can't believe investors are paying that much for that ground. The numbers will never work for them.
 
"Investors buying farmland today are taking on large risks for the possible rewards going forward," Brian says. "Prices are at record highs. Cash yields are at record lows. Farmland is illiquid. The current buyers are simply momentum trading right now. Most of these new buyers are just idiots who heard Jim Rogers say something about farming on CNBC."
 
Like most any asset, you don't want to be buying farmland when it's "hot." You want to buy when most folks can't stand the thought of owning that asset... which brings us to an even better "land play": natural gas.
 
While hedge funds are buying farmland at record high prices, we're buying some of the world's best natural gas reserves at record low prices. We already noted the International Energy Agency (IEA) calling for the "golden age of gas."
 
Penny Stock Specialist editor Frank Curzio is currently covering the natural gas "megatrend" in his newsletter. He sees natural gas being increasingly used as fuel for transportation and power generation. The shift to natural gas will change the American economy... and send many natural gas stocks soaring. Frank covers his favorite ways to play this trend in a recent special report. To learn more, click here...
 
Regards,
 
Sean Goldsmith




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