The share price of gold miner Centamin* (LON:CEY) has slumped by over 12% in the last two weeks. Apart from a 1.5% fall in the price of gold in the same time period, the only other significant news regarding the company was the sale of almost £40 million of shares by its Chairman, Josef El-Raghy.
While £40 million is a large amount of money by anyone’s standards, given Centamin has a market capitalisation of £1.8 billion it is small change. However, it is the signal which such a relatively large share sale gives to investors which matters the most. It can cause uncertainty, since investors may adopt the view that the Chairman is unsure of the company’s future, valuation, or both. Therefore, insider dealing still seems to matter in the short run – especially in today’s rapidly changing investment world.
However, the extent to which it affects long-term returns is somewhat questionable. The ability of any senior manager at any company to accurately and consistently predict investment returns is probably no better than the average investor’s. Therefore, I think Centamin’s now lower valuation following its share price fall makes it an even better buy, with the bright prospects for gold being the key reason.
Follow their lead?
All investors have weaknesses and in my opinion one of the most common is a tendency to rely on authority figures when making decisions. They may be senior managers within the company in which you are an investor, well-known investors or successful business people. For many investors, their actions carry an authority and weight which influences their decision making. For example, an investor may follow Warren Buffett’s lead on a particular stock, or follow a CEO or Chairman after they buy or sell shares in the company for which they work.
Following Warren Buffett over the last few decades would obviously have been a good move. He’s outperformed the S&P 500 for a long period of time. However, he is a successful investor, not a successful manager within a listed company. The success of following their investment decisions and/or opinions is more questionable. For instance, in 1929 the Rockefeller family and a range of other business leaders piled into shares. After a one-day rise, their investments proceeded to collapse.
In that scenario, the business people involved were more likely to be buying to try and calm investors, rather than because they had a unique insight into how future events would pan out. Today, little has changed, in my view. There are so many variables which influence share prices that even if a company’s financial performance is likely to deteriorate, its shares can still offer outperformance versus the wider market. And vice versa: just because a company’s sales or profit rise does not necessarily make it a successful investment, in my opinion.
In Centamin’s case, the sale of shares by its Chairman may have contributed to a falling share price. However, in the long run I believe its investment case is now stronger than prior to the share sale. The main reason for this is the company’s valuation. Now it’s fallen 12%+, Centamin has a P/E of 15.3. Two weeks ago it was 17.4. In my opinion, given the outlook for the company and for the gold price has not changed materially in that time, logic says the company’s shares are more worthy of a buy than they were a fortnight ago.
…logic says the company’s shares are more worthy of a buy than they were a fortnight ago.
In my opinion, the future for gold shares is volatility in the short run and growth in the long run. I think there is still some way to go until the political events of the last nine months shake out and a clear pattern emerges. I had thought higher uncertainty would cause the price of gold to rise dramatically. While it has done since the New Year, it has gained less than I expected. However, I believe there is still potential for uncertainty as Trump’s policies begin to be implemented and Brexit talks get underway.
Particularly, though, I think gold will rise because of higher inflation. Trump’s spending plans include tax cuts for millions of Americans and increases in defence spending and infrastructure spending. In other words, a more accommodative fiscal policy. In spite of the hawkish tone of the Federal Reserve, I think they will struggle to stay ahead of the curve on interest rate rises and inflation. This is partly because of time lags, but also because of a fear of slowing down the recovery in the US economy. In my opinion, this will be good news for gold as it has historically been viewed as a hedge against inflation, and I see no reason why things will be any different this time in that respect.
Centamin’s shares are not a perfect tracker of the gold price. However, like any pure play resources company, its success or failure is largely dependent on the price of the commodity it produces. Although the company’s chairman has sold a large amount of shares, I do not believe this is a sell signal. If it was a consistently successful investor such as Warren Buffett, then it may be worth considering. But since share prices include such a vast array of variables and senior managers in general have a questionable track record at predicting future share price movements, I think Centamin’s outlook remains positive.
Its shares are now cheaper than they were two weeks ago. For me, that means more growth potential. I’m bullish on gold because I think uncertainty may rise in the remainder of 2017, and higher inflation in the US may lead to increasing demand for the precious metal. Therefore, rather than a director sell making Centamin less appealing, I think it makes it an even more logical buy.
* Robert Stephens, CFA, owns shares in Centamin at the time of writing.