Top 10 Gold Plays Revealed

The Gold Report: What are some of your strategies for picking stellar gold stocks and limiting risk?

John Doody: We cover 70 mining and royalty stocks. In the selection process, we reduce it to our top 10. It's an ideal number because if one stock falls by 50% in value, it only affects your portfolio by 5% total. If a couple of stocks double or triple, they can really pull up the whole portfolio. If someone argues for investing in 8 or 12 stocks, we wouldn't argue with that. But I see too many people at gold shows who have one or two and think they are diversified. They aren't. Too many others have 20 or more, which is too many to follow and too many to have outstanding portfolio returns.

Our premise is that the market is inefficient and doesn't value all 70 stocks we cover appropriately all the time. Since an ounce is an ounce is an ounce, GSA's metrics can show which companies are undervalued and which ones are overvalued. These are our market capitalization per ounce numbers, market capitalization meaning shares times price. What's the market capitalization of an ounce of reserves? What's the market capitalization of an ounce of production? That's the initial filter.

We look at a whole range of factors and ask the big questions. Is it a producer or is it just getting started? Where are the mines located? Are they in politically safe areas or are they risky locations? Are they open-pit mines primarily or underground mines? What's the cost to produce an ounce? What's the operating cash flow from the mines?

We only look at producers or near-producers. No exploration stocks, because there is no data. Some of these exploration companies do mature and get our coverage later on.

We build our Top 10 portfolio based upon integrating all of these factors and don't get over-weighted in one sector or the other. For example, we have one silver stock in the portfolio. And, I've always felt silver is a derivative of gold. As gold goes up, silver will come along. But our real focus is on gold.

TGR: Of those Top 10 stocks, how many of those projects have you visited?

JD: About half. A lot of them have a whole bunch of projects, such as Goldcorp Inc. (TSX:G; NYSE:GG). I've been to two or three of their mines. But, others only have one. (more)