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Triple-Digit Returns Likely in Two Years with Golden PaychecksBy
Thursday, July 28, 2011
Longtime readers know I call this "one of the best business models I have ever seen."
I'm talking about the business model of precious metals royalty companies, like Silver Wheaton. When I first recommended Silver Wheaton, I explained its business model this way:
Its business is driving to the bank and cashing royalty checks. When your business is depositing big checks payable to you, it's near impossible to lose money.
Silver Wheaton is the king of the royalties business model in silver. And Royal Gold is the king of earning royalties in gold...
Shares of Royal Gold (NASDAQ: RGLD) are actually incredibly cheap right now. I believe triple-digit profits are likely in two years' time. Here's why...
Royal Gold makes money on gold royalties. So when the price of gold goes up, Royal Gold becomes more valuable... and your "golden paychecks" (dividends from Royal Gold) increase. The same thing happens when the number of properties that Royal Gold earns a royalty on goes up: Royal Gold becomes more valuable, and your golden paychecks increase.
Fortunately for Royal Gold, both of those have been happening: gold has gone up, and so has the number of royalties...
Both of these going up has caused the share price of Royal Gold to go up. It's now at all-time highs. But don't let that discourage you. Royal Gold's share price has not kept up with the amount of value created by these two things.
In April, I told True Wealth readers, "Royal Gold has only been this cheap twice in the last decade – January 2002 and May 2004. The first time it was this cheap, the stock soared over 400% in 13 months. The second time, it soared nearly 250% in 21 months. Now, it's cheap again."
 I also said, "A triple-digit gain is possible... over the next 24 months – even if gold does nothing." But if the gold bull market continues, Royal Gold "could soar hundreds of percent – as it's done twice already in the last decade." Royal Gold is up about 20% from when I wrote that, versus a flat stock market.
And there's much more to go. The chart below shows our "fair value" indicator versus the current stock market value of Royal Gold. This fair value indicator is simply 20 times the 12-month trailing royalties of the company. (Credit goes to John Doody – editor of Gold Stock Analyst – for estimating future royalties and coming up with this fair value indicator.)
You can see how much potential this stock has over the next two years or so...
 Just about all Royal Gold's gold royalties are from gold reserves located in the Americas – in stable countries like Canada and Chile, with world-class partners. For all the details, check out Royal Gold's Investor Presentation at www.RoyalGold.com. (Click on Investor Relations, then Presentations, then the PDF from the Bank of America conference.)
No need to get bogged down in the details though. The story is simple...
Royal Gold earns royalties on gold. Those royalties will increase in size (as will your "Golden Paychecks" – your dividends from Royal Gold) as new mines come on line and as the price of gold goes up.
The first of those – royalty growth – is a certainty. The second – gold going up – is pretty darn certain as well, watching what's happening in Washington D.C. this week.
Hundreds of percent returns are possible between now and the end of 2013 if gold moves up a bit. If gold does nothing, you could still double your money.
Since you have hundreds of percent upside, you can use a 50% trailing stop here. That's what my subscribers are doing in True Wealth. They're already up 20% in just a couple months... but you haven't missed it.
Good investing,
Steve
Further Reading:
Silver Wheaton is one of our favorite ways to invest in precious metals. And after its sharp correction this spring, we're finally seeing a lot of bullish action in the company.
For short-term traders, Jeff thinks the recent run in gold stocks could be nearing a top... but he says there's still time to get in.
"What you want is a good-quality gold stock that has lagged behind the action in the sector and now looks ready to play 'catch up,'" he writes. "If you find that stock, trade it. After all... there's still plenty of upside here."
Get the details here: Your Final Shot at the Gold Stock Buy Signal.
Market NotesWHY WE SAY "THINGS CAN'T BE THAT BAD!" It didn't take long for Cummins (NYSE: CMI) to get back into the good graces of its uptrend.
Regular DailyWealth readers know we monitor shares of Cummins for an "instant read" on the global economy. Cummins is the world's largest independent maker of high-horsepower diesel engines... the kind that power bulldozers, cranes, heavy trucks, mining shovels, and electrical generators. This makes its share price rise and fall with the pace of economic and infrastructure activity. For example, we noted the stock's big breakdown in January 2008, which came well before the economic crisis.
Back in June, we noted how Cummins had broken its long post-2008 crisis uptrend to reach a six-month low. We said its weakness was enough to raise our "antennae." But as you can see from our updated chart, this "high horsepower" indicator has snapped back into its uptrend.
This week, Cummins impressed Wall Street analysts with incredible quarterly revenue growth of 45%. This huge growth has pushed Cummins back into its long-term uptrend... and close to its all-time high around $120 per share. When we see this sales growth and share-price strength, we have to say, "Sure, there are things out there worth worrying about… But if Cummins is still booming, things can't be all that bad!"
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