(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Gold stocks have fallen nearly 19% from their highs in 2018 as measured by the VanEck Vectors Gold Miners ETF (GDX), which holds 49 stocks. A strengthening U.S. dollar is pushing the price of gold lower resulting in stock prices dropping. Gold and the dollar have an inverse relationship, and should the dollar strengthen further, gold's decline may get even steeper.
The individual mining stocks have fallen even more than the ETF in some cases and, based on technical analysis, are facing even steeper declines. Gold miners’ revenue is tied to the price of gold, and should prices fall, revenue drops, causing earnings to decline. Technical analysis suggests more declines are ahead for Barrick Gold Corp. (ABX) and Goldcorp Inc. (GG), which may fall by 15% or more, while Randgold Resources Ltd. (GOLD) and Agnico Eagle Mines Ltd. (AEM) may fall by roughly 11%.
Goldcorp's Bearish Chart
The technical chart of Goldcorp has been trending lower since early 2017 when the stock reached a high of nearly $18. Now the stock has fallen below critical technical support at $12. The downtrend and the technical support line form a pattern known as a falling triangle, a bearish technical continuation pattern. Now that the price has fallen below support; shares may drop to roughly $9.65 to reach its next level of support from its current price of $11.30, about 15%. The relative strength index (RSI) has been trending lower since late May, and despite hitting oversold levels below 30, the trend is showing no sign of reversing, suggesting the stock has yet to bottom.
Lowering Quarterly Estimates
The fundamentals for the business are dreadful, as analysts slash their earnings estimates for the coming third quarter in half to just $0.04 per share, amounting to a decline of more than 46% versus the same period a year ago. Revenue estimates have dropped by more than 3% to $848.5 million and are expected to fall by 2% versus last year.
Reducing the Full Year
The outlook for the full year doesn't get much better. Analysts see earnings falling by more than 30% while revenue is seen rising by a little more than 1%. Analysts estimates previously called for earnings to decline by only 6% while revenue was seen rising by more than 5%.
Should the price of gold continue to fall, earnings and revenue revisions are likely to get even worse. The technical charts suggest the worst is still not over, with more pain ahead.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.