Buy the Dip in Facebook? Or Buy the Dip in Gold?

by JDH on July 28, 2012

Buy the dip in Facebook?  Are you insane?  Of course not.  (My apologies; I thought for fun I would ask an intentionally stupid question, to see if anyone would actually read an article with such a moronic notion).  From an over-hyped IPO at $40 down to close to the $22 level, this is a stock to avoid.  I real feel sorry for poor ole Mark Zuckerberg whose Fortune Falls $1.6B As Facebook Shares Drop.  Very sorry.

(Of course I would feel even more sorry if Facebook and their greedy brokers had not increased the IPO price to an excessively high level, and had not increased the number of shares offered, proving that greed is not always good.  It’s no surprise that Facebook is now the worst performing IPO of the last decade, but I digress).

For a happier picture, let’s review the chart of AEM.TO – Agnico-Eagle Mines Ltd.:

Here’s an example of a gold stock that has actually improved over the last few weeks.  From a very solid bottom around $32 (touched in February, and then re-tested in April), Agnico-Eagle has had a series of higher lows ($34 in May, $36.50 in July) before jumping up to almost $45 on July 27.

Various production issues have caused a massive correction in this stock (it was over $85 back at the end of 2010), but the market is starting to realize that perhaps the worst is over and it’s time to get back in to AEM.

Here’s another plus: Agnico-Eagle pays a quarterly dividend of 20 cents (and has paid a divided for 30 consecutive years).  At Friday’s closing price that’s a 1.8% return.  You won’t get rich on 1.8%, but for a stock that’s probably closer to the bottom than the top, I see it as a relatively low risk way to play the gold market.  I own it, and have for some time.

Will I be buying more?

No, not today.  My guess is that the $44 level will be significant resistance, with a normal pullback into the $40 range likely over the next few weeks, so on Friday I sold August 44 calls against some of my shares to lock in some of the profit gained over the last few weeks.  If the stock keeps rising I lose the bet on the options, but gain on the stock, so I’m protected either way, and I’ve lessened my risk.

Reducing risk is a prudent strategy, because what comes up, also comes down.

You will recall my strategy on RGL.TO – Royal Gold Inc., which I discussed back in June in Outsmarting Myself on Covered Call Option Writing, where I wrote calls to protect my gains in Royal Gold.  In that case Royal Gold continued to increase, and I was forced to buy back the calls I sold at a loss.  Fortunately I just sold them again the following month, and Royal Gold pulled back so I was able to exit my call position at basically break even.

But that’s my point: Royal Gold looked like a great buy at $60 back in May (and it was), and at $82 it looked like my best investment ever.  As it dropped below $74 in mid-July it wasn’t looking quite as good.

However, again, this is a stock that pays a dividend close to 2% (depending on your entry point), so a buy and hold strategy, where I get to cash the dividend cheque and hold for stock appreciation, makes sense.

So, my point:

Stay away from over-hyped stocks selling air like Facebook.

Instead, make prudent investments in dividend paying blue chip gold stocks as the core of your portfolio (and take a few fliers on some juniors).

It works for me, and I have no problem sleeping at night.

Thanks for reading; see you next week.