«We’ve reignited speculation. At this point, it’s an all-out printathon: In 2008, the Fed printed up a trillion dollars in eight months. Now, they have printed up two trillion dollars in six weeks.»

«We’ve reignited speculation. At this point, it’s an all-out printathon: In 2008, the Fed printed up a trillion dollars in eight months. Now, they have printed up two trillion dollars in six weeks.»

Interview

«This Is a Perfect Environment for Gold»

Fred Hickey, editor of the investment newsletter «The High-Tech Strategist», warns that the stock market is still in a bubble. The veteran investor says why he avoids red hot technology stocks like Amazon and instead bets his money on gold mining companies.

Christoph Gisiger
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Since the monster crash in March, stock markets have calmed down noticeably. Yet, this week’s unprecedented turmoil in the oil space raises new concerns that financial markets remain fragile despite massive monetary and fiscal stimulus programs.

For Fred Hickey, this is a key reason to bet on precious metals. «Gold does well in chaos and uncertainty,» says the renowned contrarian with nearly four decades investing experience in the tech sector.

According to his view, most technology stocks continue to be massively overpriced. This is especially true for highly speculative names like Tesla, Zoom Video or Netflix. He also spots vulnerabilities in the stocks of industry heavyweights such as Apple, Facebook and Google.

In this in-depth interview with The Market/NZZ, the editor of the popular investment newsletter «The High-Tech Strategist» explains why he sees better investment opportunities in the gold mining sector where he points out names with catch-up potential such as Agnico Eagle Mines and Alamos Gold.

Mr. Hickey, since the lows of March, stocks are up 25%. What are your thoughts on this surprisingly quick recovery from a value perspective?

You have to put this in the context: We were in a great bubble driven by the actions of the Federal Reserve, just as the 2000 and 2007 bubbles. Because of that, valuations went to extreme levels. By some measures, like the price-to-sales ratio, valuations were the highest in history, except for 2000. So even if the major market indexes are down year-to-date, you have to remember that we had an eleven-year record run before this correction. Just look at market cap-to-GDP which is supposedly one of Warren Buffett's favorite indicators. It’s currently at 130%, a level that has only been seen twice: Today obviously, and in 2000. That means we’re still at bubble levels.

And what’s your view on tech stocks, your area of expertise?

The Nasdaq 100 is nearly unchanged year-to-date, and many story stocks are ridiculously overpriced. Look at Zoom for example: There are a lot of other players in video conferencing, and Zoom has issues like security problems. You have Tesla which has gone from $260 to $700. Yet, it’s major plant in California is shut down, and so are all its showrooms in the US. The auto market around the world has collapsed, and Tesla doesn’t even have federal tax credits anymore. So how can you have the stock up like this? I think this is a litmus test to determine whether the market is crazy or not - and, of course, it’s crazy. Tesla has a $133 billion market cap, which is two times the size of Boeing. That’s insane for a company that makes no money.

What’s behind all this madness?

We’ve reignited speculation. At this point, it’s an all-out printathon: In 2008, the Fed printed up a trillion dollars in eight months. Now, they have printed up two trillion dollars in six weeks. Money supply in terms of M2 is up to almost $17 trillion versus $14.5 trillion a year ago. Most of this money is going into assets, just as it did before. Some of it is going to help families, but the vast majority is in all this alphabet soup of programs that the Fed has launched to basically support every market. That money is going into stocks «that are working» like Tesla, Netflix, Apple, Microsoft or Amazon. That’s very unhealthy.

Then again, many investors look at 2020 as a «one-off year» and already focus on 2021.

This is a rationalization to justify piling into the same ridiculously overpriced names. We’re looking at the greatest downturn since the Great Depression. The IMF says this is the biggest decline globally since the 1930s. So are investors just going to look over that? You don’t even know how long this COVID-19 problem is going to last. You don’t know when businesses are going to be able to come back. Many of them aren’t coming back very soon like the travel industry, hotels or airlines. They are going to have to make major adjustments. So are you really going to look over all this uncertainty?

Still, some big tech names like Amazon are perceived as winners of this crisis.

Amazon is helping to deliver a whole bunch of stuff to people right now. Here, at least the story is better, but that doesn’t justify a 100 P/E valuation. True, a lot of people are working from home and you have the cloud being used more. That benefits Amazon as well as Microsoft. But again: That doesn’t justify Microsoft's stretched valuation. I like Microsoft, and I bought the stock around a month ago when the market was getting hammered. At that time, I bought like a dozen tech stocks. But I can’t buy them today. My hands are tied, and I sold them all. I bought the bottoms in 1990, in October 2000 and in October 2008, although at that time, the lows weren’t reached until March 2009. So if there is another big sell-off, I will be a buyer again since I’m a value investor.

This week, leading US semiconductor manufacturers like Intel and Texas Instruments have released their quarterly earnings. What’s your take on the chip sector?

It’s crazy: In 2019, the SOX index was up something like 60%, and it was the worst year for semiconductors sales in a decade. Semiconductor stocks have only given back a little bit this year, they’re only 10% down year-to-date. Valuations are extreme, especially since demand is collapsing for all sorts of things that use semiconductors, and we don’t know when demand comes back. Texas Instruments reported terrible auto segment results, and inventories are rising to the moon. Yet, the SOX has barely given back any of its gains.

2020 was supposed to be the year of the big 5G rollout. What’s the impact of the new wireless technology on the semiconductor industry?

After being the industry’s key driver for many years, the smartphone market is soft. So they were hoping for 5G, creating the story that it was going to be the next big driver. We saw some adoptions last year, particularly in South Korea and China. But even before COVID-19, demand in South Korea started to tail-off significantly because there aren’t enough applications to drive people to upgrade to 5G and pay more for these expensive phones. Now, we’re in a situation where people don’t have any money. We’re talking maybe a depression. People need to pay for food and rent, they don’t need discretionary items like a 5G phone. Even in the 1920s, there were all kinds of breakthroughs like radios, TVs and all that stuff. But everything slowed down during the Great Depression - and that’s what’s going to happen to 5G. It wasn’t ready for prime time, and now it’s going to be put off.

What are the implications of the 5G delay for Apple?

There won’t be a «5G super-cycle». Apple’s products are made in China, and most of its engineers are in California. They can’t travel and build up the system and get the production lines going that will produce these new phones. They are doing it via video conference, but there is only so much you can do this way. It slows everything down. Now, we’re hearing that Apple’s 5G phones will be late. Apple may announce them as usual in September, but they won’t be available in any kind of significant numbers. Still, Apple’s stock has a $1.25 trillion market valuation.

Amid slowing iPhone sales, Apple touts its services business as the next growth driver. Will this strategy work?

Apples primary revenue driver is phones. Everything else feeds off phone sales. Because their phone sales are falling, they’re not going to get add-ons. Their numbers are going to be terrible. They are not benefiting from the stay at home business. A year ago, Apple didn’t have any of these problems and investors started anticipating new phones. So how can the stock be up 35% over the last twelve months when earnings are going to collapse? Apple’s stock has been held up by massive buybacks and they’re borrowing a lot of money to do so. They still have a net cash position, but they are going to take it down to zero. So at some point, they’re going to lose that prop. Also, Warren Buffett was buying a lot of shares, and he has a full position now. You better hope that he doesn’t understand that Apple’s business is going to plunge because when he starts selling, you are going to have a big problem.

Next week, we’re going to hear from Google and Facebook, too. How are the two big internet platform companies holding up in this environment?

Regarding the biggest tech names, Facebook and Google are second most exposed to the economic downturn after Apple. The problem is that a vast majority of their revenues comes from advertising, and advertising is discretionary. We’ve already seen that the advertising industry numbers and the rates for Google and Facebook start to plunge. Their stocks don’t have a story as Microsoft and Amazon do. That’s why I think they’re vulnerable. But if the central banks print enough money, their stocks are still favorites for many investors. They have a lot of cash and their cash flow is pretty good. So even though their earnings will be down, they’re far from being in danger of bankruptcy.

Where are you putting your money against this backdrop?

This is a perfect environment for gold: For starters, there is a strong inverse correlation between the price of gold and negative interest rates. Second, institutions own less than 1% of their assets in gold, whereas in the past it has been as high as 5 to 7%. That means institutional investors are going to be huge buyers. Third, we’re in an environment of huge money printing and massive budget deficits. And, budget deficits and gold are strongly negatively correlated. What's more, there haven’t been any large discoveries for many years, and average grades have been going down. There are shortages, as we’ve seen in the recent disconnect between futures and spot prices. The only blip in the argument is that because of Covid-19 some of the gold mines are shut down. But now, a whole bunch of mines are coming back on stream. When all the mines are operating again, they’re just gushing cash at these prices. That means the earnings of miners will rise and so will their dividends.

In the investment world, you're primarily known as one of the most renowned tech investors. Why has your scope widened into the gold space?

Gold does well in chaos and uncertainty. It doesn’t do well in goldilocks-times when everything is wonderful, growth is strong, inflation is low, world trade is good and everybody is happy. During such times, you don’t need gold. But right now, it’s exactly the opposite: It’s chaos, it’s uncertainty, it’s massive money printing. In the late 1990s, everything looked great: We had budget surpluses and we had the greatest economy ever people thought. It was better than goldilocks and gold bottomed. But then, when things turned in 2000, gold started to go up and that was the beginning of the secular bull market. That was when the Fed really started to get crazy and created bubbles, one after the other. I never owned an ounce of gold until late 1990 when I started to get concerned about what the Fed was doing, but I could never have imagined that we would be where we are today.

Looking at this economic downturn, there’s a credible case for deflation in the short-term. What does this mean for gold?

Deflationary periods are usually chaotic, and gold does well in chaos. In the past, we had periods with deflation, a couple of them in the 1800s and another one obviously during the 1930s. During those times, gold went up 40% on average. In the 1930s, Homestake Mining was the largest gold mining stock in the US. During the plunge in the stock market from 1929 to 1932, it doubled in price. And, through all of the Great Depression it was up by 500%. Other mining stocks like Dome Mines did even better. Also, when economic growth declines, so does demand for commodities. For a lot of miners, energy is one of their largest costs. This year alone, oil has plunged 80%, and mining companies are locking in these prices. Other commodities they use have become much cheaper, too. So you combine the price increase in gold with lower costs and you’ve got massive earnings, cash flow and dividend increases. That’s what happened in the 1930s: Homestake Mining doubled its dividend.

Where do you spot opportunities in the gold market for investors today?

Gold miners will be one of the few industries showing growth in earnings, dividends and cash flow. For instance, Newmont Mining has just increased their dividend. For these reasons, momentum investors will be looking at the sector and they already have started to gravitate to gold stocks. That’s why you see the great outperformance of the biggest gold miners. Newmont and Barrick, the ones the institutions, the smart money is flocking to, are up close to 45% year-to-date. What’s more, Newmont happens to be the only gold miner in the S&P 500 which makes the stock more attractive to the institutions.

With that in mind: How are you positioning your portfolio?

Newmont and Barrick are two of my biggest holdings, but I wouldn’t buy those now. I would buy the ones that have lagged. Agnico Eagle Mines is down 2% this year. Yet, the company is one of the best managed miners in the world. They have increased the dividend for six consecutive years, but they had a hiccup in the first quarter. These problems have mostly been fixed. So this stock is going to catch up, I believe. Additionally, of any of the majors, Agnico is the best placed geopolitically. Their mines are in Canada primarily, they have a big mine in Finland and some mines in Mexico, but that’s not a big part of their business.

What else are promising mining stocks?

The smaller miners are the ones that have been hammered the most. The VanEck Vectors Junior Gold Miners ETF is down 3% this year. There is your value. One of these names is Alamos Gold: Most of their mines are in Canada and they have a smaller business in Mexico. Locations are important to me because in a world where debt levels are soaring, chances for expropriation and taxing become much higher. Some countries are going to want to grab these mining assets. We’ve seen that in the past with Indonesia. But that’s not the case in places where you have free markets and the rule of law like Canada, the US and Australia. In the case of Alamos, the stock is extremely cheap, less than book value. The company has no debt and $200 million in cash. Its dividend is small, but it’s increasing it and will continue to do so.

The gold mining industry has gone through some rough years. What about attractive turnaround-stories?

Even smaller and riskier is New Gold: They had struggled with the Rainy River mine in Ontario, Canada. The old management screwed up which caused the stock to sink badly. Now, the company has a new management which has been very successful in the past. They almost started over from scratch and spent a lot of capital to bring Rainy River up to speed. As they ramp the mine up, New Gold will be showing significant production growth. By the end of the year, they think they will be cash flow positive and their capital requirements will be lower. At today’s gold price, they will start generating a lot of cash. At 85 Cents a share, the stock trades only half of book value. So you have a potential growth story at an extremely low valuation. It’s high risk but if this works New Gold will be a huge winner.

And what’s your favorite play in the exploration space?

Osisko Mining. It’s a real junior company that doesn’t have a producing mine yet. As I said, there haven’t been any major discoveries in the gold industry, but Osisko has built up resources in Canada of more than five million ounces with really high grades. The firm has a highly experienced management, and it seems to be an attractive take-over target for a company like Kirkland Lake. Kirkland has a lot of cash, but is being penalized because of concerns about how long their Fosterville mine will deliver high grades. It looks like they really need to fill that gap and they could be a potential buyer of Osisko: They have a program looking for takeovers and they already own a little more than 13% of Osikso.

Fred Hickey

When it comes to tech stocks, few investors have more expertise than Fred Hickey. That’s why his monthly newsletter is a must read for money managers around the world. «The High-Tech Strategist» is a unique treasure of deep insights which go way beyond the tech sector. Having grown up in Lowell, Massachusetts, in the heartland of the computing cluster around Route 128, Hickey has been fascinated by technology since his youth. After graduating from the University of Notre Dame, he started working for the former telecom giant General Telephone & Electronics. In 1987, he began writing his newsletter for his friends and family. After five years it went so well that he could make a living out of his investing tips. Today, Fred Hickey lives far away from Wall Street's daily noise in Costa Rica and in Nashua, New Hampshire.
When it comes to tech stocks, few investors have more expertise than Fred Hickey. That’s why his monthly newsletter is a must read for money managers around the world. «The High-Tech Strategist» is a unique treasure of deep insights which go way beyond the tech sector. Having grown up in Lowell, Massachusetts, in the heartland of the computing cluster around Route 128, Hickey has been fascinated by technology since his youth. After graduating from the University of Notre Dame, he started working for the former telecom giant General Telephone & Electronics. In 1987, he began writing his newsletter for his friends and family. After five years it went so well that he could make a living out of his investing tips. Today, Fred Hickey lives far away from Wall Street's daily noise in Costa Rica and in Nashua, New Hampshire.

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