Goldcorp: Implosion Offers Shiny Opportunity – Seeking Alpha

By: Mark Krieger

Goldcorp (GG) has been heading one way lately: down.

Since its August high of $52, the shares have lost more than 70% of their value. Gold’s early Friday drop below $700 prompted a potential GG capitulation, as the shares fell below $14, only to put on an impressive intraday reversal that not only erased the day’s losses, but tacked on a 10% gain, closing at $17. The stock  recorded a $3 positive swing as gold rallied 8% off its lows to close near the $734 mark.

Disconnect between gold and GG: The last time the shares were this low, nearly five years ago, gold was trading at about $400 ounce. Even though gold is 30% off its highs, it is still 75% higher than 2004 levels. It is perplexing why GG’s shares are now priced at the very same levels, as they were when gold was trading at $400. The stock is extremely oversold and has dropped too much in too short of a time. This is a classic case of the,  “baby being thrown out with the bath water”.

Panic selling is the culprit: This stock has been crushed by a “sell first and ask questions later” mentality,  but it’s not alone, as the entire mining  sector has also been decimated. It is obvious that selling pressure has intensified as hedge and mutual funds are forced to liquidate their holdings to satisfy redemption requests. Their relentless selling along with excessive short selling, margin calls and overall economic paranoia have created a recipe of disaster for the share price. Most investors are looking to buy wholesale and sell retail, but this massive overreaction offers investors the opportunity to acquire shares actually below cost.

All is not lost: The sudden collapse in the stock price creates an attractive buying opportunity for bargain hunters. The stock is dirt cheap at only 17 times 2009 earnings estimates of $1.00, and the balance sheet is squeaky clean, featuring a  $1.2  billion stockpile of  cash  and no debt. The shares are trading 10% below the company’s book value of $18.50.  The company pays an annual 18 cent cash dividend, yielding a nonimpressive 1.2%, but it’s certainly better than nothing. GG’s short position of 10 million shares is relatively small in comparison with its 700 million shares outstanding, however it could potentially be beneficial, as a short covering squeeze might come into play at the development of any favorable news.

Analyst take: The last three analyst actions all have been positive as HSBC Securities, RBC Capital Markets and Davenport have all upgraded their opinions and still maintain a average $40 one year price target.

Bottom line: This stock could run back up just as fast as it fell, but logic would dictate not opening a position until the shares show signs of stabilization. They say to buy when there is “blood in the streets”, and no doubt we have seen plenty of carnage, but picking a bottom is difficult. It would be more advantageous, before buying, to wait for validation of a positive trend in the share price, such as the stock closing above $20 for five consecutive sessions. You certainly don’t want to fall into the trap of “throwing good money after bad”.

Disclosure: Author holds a long position in GG