It’s a long way down from the top, and there aren’t many who know that better than Silver Wheaton (NYSE: SLW). The silver streaming company was able to capitalize on the uncertainty and weakness following the financial crisis of 2008. The stock, which bottomed out at $3.45 in November 2008, rode high on burgeoning silver and gold prices to reach its peak of $43.36 in March 2011.
But as the US economy has stabilized, investors fled precious metals with their capital to invest it back in stocks. As such, we’ve seen shares sink 53% from that all-time high. It seems, however, that the bleeding has stopped for the most part. In the last six months, the stock is down just 0.45%. So the question is, has Silver Wheaton reached its basement? Is now the perfect opportunity to buy? Here are just a few thoughts that might help guide you as you try to answer those questions for yourself.
A little background
Silver Wheaton sets itself apart from other silver companies in that it doesn’t actually mine any of the precious metal, rather it has agreements with silver and gold mining companies to provide an upfront cash payment in return for a percentage of the gold or silver production from the mine at an ongoing fixed cost.
This business model helps Silver Wheaton to keep itself from being wholly tied to precious metal prices because its business isn’t tied to the success of a handful of mines. With its agreements, it knows exactly how much it will be paying for gold and silver for several years and it can diversify its portfolio through acquiring assets across the globe.
But while Silver Wheaton’s business model makeup should theoretically keep its stock from being too highly correlated with the movement of silver prices, the correlation is there.
It’s all about the silver
During Q4 2014, Silver Wheaton saw a 16% decrease in revenues from the previous year. However, during that same period, silver equivalent sales volume actually increased by 7%. So if they’re selling more silver, that should be a good thing, right? It’s a double-edged sword. The fact that sales volume increased shows that Silver Wheaton’s business model works. In fact, in spite of sagging silver prices, it still managed $52 million in net earnings and a profit margin of 32.22%. But the kicker here is the movement of the price of silver during that time. According to the results, the average realized price per silver equivalent ounce sold dropped 22% from the previous year.
According to one Motley Fool article, though, silver is expected to make a comeback. Citing the gold-to-silver ratio—basically how many ounces of silver it takes to buy one ounce of gold—the author believes that silver has entered the undervalued space. The historical ratio is 58 ounces per silver for one ounce of gold, but the current ratio sits at 70 ounces of silver per ounce of gold. Furthermore, a year ago the ratio was 64.
From this ratio alone, it’s not hard to see that silver could make a comeback. If it does, Silver Wheaton’s low-cost business model stands to make a killing on it.
A big threat
While the technical analysis may point to a silver recovery, there’s one thing investors shouldn’t forget: silver thrives when the alternatives don’t, and it sinks when the alternatives thrive. So when the Federal Reserve’s vice chair Stanley Fischer follows up Janet Yellen’s speech about increasing interest rates with a statement that the increase will likely happen this year, that’s not a good sign for silver.
This is because with an interest rate hike, investors will correspondingly shift capital toward higher yielding assets. It’s also because an interest rate hike is a sure sign that the economy is getting closer to stand on its own.
So is it time to buy Silver Wheaton? It’s hard to say. On one hand, silver is certainly undervalued right now compared to gold, meaning there is room for some upward momentum in the short term. But by that same token, signals from an improving economy don’t bode well for silver prices in the long run—at least not until the next recessive cycle. In short, there’s nothing wrong with putting some of your eggs in this basket, but it would be wise not to put too many in.