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Sector Spotlight: Is Agnico Eagle Mines Ltd (USA) a Gem?

Agnico Eagle Mines Ltd (USA) has been a sector standout, but Wall Street remains wary

by 8/8/2014 11:35:54 AM
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Gold futures have added roughly 2.3% so far in August, comparing most active contracts, as the recent broad-market pullback and escalating conflicts overseas have bolstered "safe haven" demand. Nevertheless, precious metals stocks -- including Agnico Eagle Mines Ltd (USA) (NYSE:AEM) -- remain underloved on Wall Street, as evidenced by data from Schaeffer's Senior Quantitative Analyst Rocky White.

Of the 28 stocks under our "precious metals" umbrella, 86% are trading above their 80-day moving averages -- the highest percentage of the 40 sectors we track. Furthermore, the average year-to-date stock return is 22.6%, and the Market Vectors Gold Miners ETF (NYSEARCA:GDX) -- a broad measure of the gold mining industry -- has advanced nearly 28% in 2014.

However, analyst "buy" ratings for the group are dwindling. Just 45% of covering analysts offer up "buy" or better opinions, compared to more than half a year ago. Likewise, the average short-interest ratio is 13.77 -- meaning it would take more than two weeks to buy back all the shorted shares on a typical stock in the sector, at the equity's average pace of trading. This bearish sentiment backdrop juxtaposed against an uptrending sector has bullish implications, from a contrarian standpoint.

Digging in, AEM is among the best-performing of its peers, up nearly 48% year-to-date. The stock tagged a new annual high of $42.41 in late July, before pulling back to test support at its upward-sloping 10-week moving average, currently located just south of $38.

Weekly Chart of AEM since September 2013 with 10-week Moving Average

Despite outperforming the broader S&P 500 Index (SPX) by 18.5 percentage points during the past two months, AEM, like Rodney Dangerfield, gets no respect. Short interest jumped 17% during the most recent reporting period, and option players are picking up puts over calls at a faster-than-usual clip. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 10-day put/call volume ratio of 0.29 ranks in the 86th percentile of its annual range.

Meanwhile, 11 out of 18 analysts maintain tepid "hold" opinions of the shares, and the consensus 12-month price target of $41.07 stands within a stone's throw of AEM's current price of $38.98.

A continued uptrend could spark a short-squeeze situation, a mass exodus of option bears, or a round of upbeat analyst attention -- all potential catalysts to the upside. In fact, analysts at CIBC changed their tune this morning, upping their price target on Agnico Eagle Mines Ltd (USA) (NYSE:AEM) to $45 from $40, and underscoring their "sector outperformer" recommendation.


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