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Why These Silver Stocks Could Bounce In A Major Way

 May 14, 2012 01:01 PM

(By Street Authority) As I was reviewing the list of stocks hitting 52-week lows this week, I noticed an unusual cluster of stocks: silver-miners. These stocks have been under heavy pressure in recent weeks and are falling anew, leaving them -- at least in the context of recent trading patterns and valuation sentiments -- quite cheap. Then again, just because something is cheap doesn't mean it's a bargain. After all, stocks moving below their 52-week lows can fall yet further before rebounding. So are these lagging silver-mining stocks offering up value, or are they just a value trap?

[Related -Goldcorp Inc. (USA) (GG): Which Gold Stocks Should You Buy This Year?]

Here's what I found...


The cycle and costs -- a double whammy
Silver miners, just like any other mining firm, are seeing rising costs as labor and equipment expenses have both risen steadily in recent quarters. Higher expenses aren't a short-term blip -- they're the "new normal." Adding insult, commodity prices have been steadily falling on concerns that a European economic implosion will affect global trading partners from Brazil to China.

Yet here's the most important factor: Even with rising expenses and falling selling prices, silver miners continue to be a solidly profitable group. The EPS (earnings per share) figures noted above actually understate their profitability. High levels of depreciation dampen net income, but operating cash flow per share for almost every one of these companies is solidly higher than that EPS figure.

Emotions rule
Yet these stocks aren't selling off on valuation. Instead, investors are increasingly spooked that the troubles in Europe will put a brake on global economic growth, crimping demand for silver and pushing prices ever lower.

Silver has actually been on a roller-coaster ride since the start of 2011.

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