China’s Shocking Currency Move Lights a Fire Under Contra-$$ Stocks

Welcome to your first Weiss Ratings Daily Briefing! I trust you’ll enjoy the new format and frequency of our alerts, which we outlined recently.

Just in case you missed the details: You will now receive four email newsletters per week, rather than one. They’ll be waiting in your inbox each morning on Monday, Wednesday, Friday, and Saturday. Each will be packed with valuable investment insights and actionable advice.

Monday is the day for my “Stocks & Sectors Edition.” In this one, I want to talk about some shocking developments in China, and what they could mean for so-called “contra-dollar” stocks.

Let’s start by explaining what those are. In simple terms, they’re stocks that tend to move in the opposite direction of the U.S. dollar. Gold and silver miners are a key example. The yellow metal often rises in value when the dollar falls, and vice versa – with mining stocks following suit.

The dollar surged in late-2016 on renewed optimism about the U.S. economy, as well as expectations for a more aggressive Federal Reserve. A sharp bout of depreciation in the value of the Chinese yuan against the dollar also gave the buck a significant boost.

That caused gold and gold mining shares to significantly underperform the market. The yellow metal itself dropped 12.4% in the fourth quarter of 2016, while the VanEck Vectors Gold Miners ETF (GDX) fell 20.8%. Both were far worse than the 3.3% rise in the S&P 500 over the same time period.

But in the first few trading days of 2017, the Chinese government and central bank moved to aggressively support the value of the Chinese currency, called the yuan. First, they jacked interest rates up. Second, they encouraged state-backed companies to sell foreign currencies and buy the yuan. Third, they enhanced policies designed to make it tougher for citizens and companies to move money out of China.

Those steps combined to drive the yuan sharply higher against the buck. In fact, the Chinese currency had its biggest two-day gain against the dollar ever in Hong Kong (the “offshore” market where it trades more freely than on the mainland). Other Asian currencies rallied in kind, while the broad Bloomberg Dollar Index dropped the most since September.

Could this be the start of something good for contra-dollar investments in general, and precious metals companies in particular? It sure looks that way to me, especially because sentiment is so bearish on them.

So I took a look at the 113 precious metals mining stocks in our Weiss Ratings universe. They had to have at least $50 million in market capitalization and 50,000 shares in average daily trading volume.

There are very few BUY-rated stocks in the sector, given the tough times that have befallen miners over the past couple of years. In fact, the BUY/SELL ratio for the industry is just 0.023, compared with 4.71 for the S&P 500.

But some of the stocks near the upper-end of the HOLD universe may be worth a look. The highest-ranked miner with adequate trading volume and U.S. liquidity is actually a Canadian company, Klondex Mines Ltd., that also trades here under the ticker symbol KLDX. It’s rated “C+”.

Next up is Franco-Nevada Corp. (FNV, “C+”), another Canadian company that trades here in the U.S. The Toronto-based firm owns gold mining royalty streams, allowing it to profit from metals upside without the hassle of owning and operating the underlying mines. After that comes Randgold Resources Ltd. (GOLD, “C”), a miner with operations in West and Central Africa that trades here and in the U.K.

Mining Stocks to Consider if the Dollar Falters

If you’re looking for a way to profit from China’s latest move, and a sharp bounce in contra-dollar investments, those might be good stocks to start with. They’re already up by around 5%, 6%, and 9%, respectively, so far this year (with the obvious caveat that 2017 is only a few days old!)