50% in five months.
That’s how much subscribers of Australian Small-Cap Investigator could have made if they followed my recommendation last November to buy Bellevue Gold [ASX:BGL].
I advised them to bank the win last Monday.
Not all my tips have resulted in such gains, but this one was a beauty.
Gold stocks have been on a ripping run over this period.
What you may or may not realise is how terrible gold stocks were for the preceding TWO YEARS before that recommendation.
I watched it all play out, day by day.
Here’s why I mention it…
Think about what’s fired up the gold sector lately.
Back in November, I had no way of knowing that several US regional banks would collapse.
There was no way to predict that the global interest rate hiking cycle would be stopped in its tracks.
Nor could we be confident that US dollar gold would finally breach the US$2,000 mark so soon.
What I DID know in November last year was that Aussie gold stocks had been so hammered that it would merely take things becoming ‘less bad’ for the sector for them to get a kick.
And there were enough global fundamentals in place to think gold stocks could soar again.
Individually, as a company, Bellevue Gold could deliver on its project milestones regardless of what the wider world did.
In other words, I saw a low-risk, high-reward opportunity.
My readers who followed my advice are reaping the fruits of that idea right now.
The good news, in my view anyway, is you can almost throw a dart at the stock market and see similar opportunities across multiple sectors…small caps especially!
Yep. I’m suggesting that the dynamic that just fired up gold investors will play out for the general market, but small caps especially.
Here’s one reason why, courtesy of a fund manager cited in the Australian Financial Review today:
‘Costa says now is a great time to invest because small caps ‘‘tend to have a tighter correlation with the economic cycle’’ and as a result ‘‘outperform the large caps into a recovery phase often with a sustaining multi-year cycle’’.
‘This is especially in the context of ‘‘lead economic indicators beginning to show that we will be making our way through the worst — it’s a very exciting time for them’’, she said.’
‘But’, I hear you say, ‘What about…’
Yes, I know, I know.
We’ve had all sorts of problems over the last 12 months. You don’t need to name them.
The market is highly likely to climb these worries now.
It would take something none of us is watching to really drag things back down from here.
Anything’s possible — but that’s the risk you take entering the stock market, at any time.
And small caps are particularly high risk. You can lose all or part of your investment at any time.
But here’s what’s so compelling about now.
So much bad news is priced into stocks!
That means if things turn out to be less bad, they’re likely to go up.
I can see one example of this playing out in my accounts right now.
About a month ago, I started buying shares in building products firm James Hardie Industries [ASX:JHX].
This got clobbered last year. It downgraded its earnings three times. The hit was real.
Here’s what stuck out though. After the third downgrade, the stock held steady, and indeed rose a bit.
That kind of price action suggested the market was now looking beyond the immediate issues to a potential recovery.
James Hardie operates in a cyclical business. It’s also heavily exposed to the US residential housing market.
Rising interest rates suppressed this sector in 2022.
But suddenly US homebuilders are taking off. Even at higher rates, people still need to live somewhere, and the US is short houses.
Last week came this news from Firetrail Investments:
‘Homebuilders had a strong week of performance after March US housing starts beat estimates. Housing starts were -0.8% m/m (vs -3.5% expected) and single family starts were +2.7% m/m.
‘Following the “better than expected” data, the largest home builder in the US beat expectations last night, DR Horton. The builder said “we see much more stability in both cost and demand and deliveries and margin”.
‘DR Horton is the largest customer of Aussie portfolio holding James Hardie.’
JHX is up about 7% for me as of now.
This is not a boast. I’m just showing you how some of this is playing out in real time.
JHX should be a sturdy position. But it’s not going to skyrocket 50% in five months like Bellevue Gold did.
That’s why the small-cap sector can be so thrilling to be a part of.
By the way…
This week, we’re bringing the power of machine learning and artificial intelligence to Aussie investors for the first time in 2023.
You can also access a FREE recommendation. The trade I made public when I debuted this AI-assisted trading model is up 38% since October and is still a live trade…just go here to find out more!
Editor, The Daily Reckoning Australia
PS: There will be no Daily Reckoning Australia published tomorrow due to the ANZAC Day public holiday. We will return to our regular publishing schedule on Wednesday, 26 April. Also, as of next week, Callum will be joining our Money Morning team. If you’d like to continue reading Callum’s articles, be sure to subscribe for free by clicking here.