Two Price Bumps
Average Annualized Return Per Closed Trade: 17.9%
Average Return Per Closed Trade: 15.5%
Average Holding Period: 320 days
Sotheby’s (BID) reported another solid quarter this week. Although its fiscal first quarter (ended March 31) tends to be seasonally weak compared to others, adjusted for non-recurring items, the company only lost 21 cents per share, well above the market’s expectation for a 38-cent loss. The company has now beaten The Street’s earnings expectations in four quarters in a row.
The high-end art market appears to continue on its road to recovery after a rough couple of years. Tad Smith, who took over as CEO two years ago and pledged to move Sotheby’s more into the modern age, has overseen a significant increase in digital engagement of potential buyers. Online bidders now comprise of 38 percent of total bidders, and online buyers 26 percent. Online purchases grew by 32 percent year-over-year, with a growth in online values sold of 17 percent. Total video views first doubled between the first quarter of 2015 and the first quarter of 2016, then more then tripled over the past year. The company now also has a sizeable social media audience and many of its staff now engage online users via their own media accounts to promote Sotheby’s and the company’s clients.
As we noted in early March, things are looking up for Sotheby’s. Long-term favorable trends still seem to be in place—namely the concentration of a great amount of wealth in a small percentage of the population and in the words of Tad Smith, “cross pollination of cultural and luxury tastes.”
We bump the suggested buy-up-to price to $47, which still makes the stock a “hold” at its current price. However, our long-time readers should already have shares. A price pullback would also create a buying opportunity.
It’s been a rough time for gold miners lately as gold prices fell more than 4 percent over the past month. During that period, GDX, a gold miner ETF, has fallen 7.5 percent; GDXJ, a junior gold miner ETF, has fared even worse: 14.5 percent. However, our gold pick, Franco-Nevada (FNV), actually rose 1 percent during the same period. This week’s strong quarterly report helped propel the stock above the $70 mark. Revenues of $172.7 million easily beat expectations for $160 million, and earnings per share of 25 cents also topped the Street’s expectation for 22 cents.
The beat can be attributed to better-than-expected output at the mines to which it owns streaming/royalty interest. Last year, the company achieved 464.4 million gold-equivalent ounces (GEO), an increase of 29 percent over 2015. And its 2017 first quarter’s GEO represents a 20.5 percent jump over 2016’s first quarter, indicating that the production growth at the projects in which it has invested continues.
The company’s aggressive deployment of capital to invest in high-quality developmental assets in recent years, when many miners were distressed during a down gold market (a buyer’s market), is paying off. As a streaming/royalty company, Franco-Nevada offers diversified exposure to precious metals without the many risks experienced by the operators of the mines.
Don’t forget that the stock pays a 1.25 percent dividend, and has increased payout at an annual rate of 6.9 percent over the past three years.
We increase our suggested buy-up-to price to $73.
For a more detailed table of current recommendations as well as information on closed trades, click on the ‘Portfolio’ link.