Okay, 2020 was a rough year. We all know that. But this year has been quite different.
Investors are increasingly diving into various speculative plays like they’re going out of style. Meme stock mania has picked up, and valuations are once again on the rise. For those in the hyper-growth arena, this is a good thing.
However, as we saw with March and April’s price action, this can turn around quickly. Accordingly, now may be the time to diversify and hedge out some of this exposure for those ultra-long on speculative names right now.
Portfolio safety is everything
When looking at the returns investors can get via investing in the meme stock mania, buying otherwise safe stocks can seem silly. I mean, why invest in something that could provide a “measly” double-digit annual return when you can pursue triple or quadruple-digit gains in a short amount of time.
That said, the returns we’re seeing in the market today aren’t natural. These sorts of speculative mania come and go. When investors eventually turn around and start looking for defensive value, such stocks are often bid up to levels that make them unattractive.
Today, Kirkland Lake is one of those unattractive portfolio safety plays with a tonne of value. The company’s currently trading at a rock-bottom valuation multiple relative to the market. And this valuation multiple is on top of fundamentals that are otherworldly. The gold miner produces margins of nearly $1,000 per ounce on every ounce of gold mined at current prices. With more than 1.2 million ounces of gold expected to be produced this year, and increasing production in years to come, that’s more than a billion dollars in cash flow generation per year investors can comfortably project.
At a valuation of roughly US$10 billion, Kirkland Lake is thus trading at only 10 times free cash flow. That’s insanely cheap, particularly for a portfolio hedge.
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A balance sheet of gold
The other key reason I think Kirkland Lake is extremely undervalued is the company’s otherwise pristine balance sheet.
Kirkland Lake has no debt, a growing cash hoard which looks like it’s going to hit a billion dollars soon, and some of the best margins in its industry. We’re talking about one of the best cash flow-producing gems in the gold mining space at a laughable discount.
Gold miners typically don’t have the balance sheet Kirkland Lake does. Most are heavily burdened with debt and have reasons to have lower valuation multiples. Kirkland Lake doesn’t. This is a pristine play in an otherwise beaten-down sector. Accordingly, investors ought to consider this stock at these levels.
After all, it may not be this cheap for much longer.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Chris MacDonald has no position in any of the stocks mentioned.