Should Silver Stocks Be A Part Of Your Portfolio?

June 21, 2022

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By MarketBeat. Originally published at ValueWalk.

Silver prices continue to remain elevated, trading at $21 an ounce. During times of inflation, silver stocks could be one of the ways to hedge your portfolio against macroeconomic headwinds. Silver prices remain on a firm footing, as demand continues to outpace supply, with total production at 997 tonnes in 2021 and demand at 1049 tonnes. Strong industrial, jewelry, and bars & coins demand is expected to continue through 2022, which should continue to provide support to prices.

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Overall, silver producers expect demand to significantly ramp up in the next few years as industrial demand substantially increases. The most significant trend that should increase demand for silver in the next decade is going to be green technology. From renewables to electric vehicles, all of which require a high degree of silver to produce should push demand up to record levels.

Furthermore, the difference between supply and demand should ensure prices remain where they are even though central banks continue to remove liquidity from the global markets. Another factor that could push up silver prices is the gold-silver ratio. The gold-to-silver ratio continues to be at a multi-decade high, and silver prices need to go much higher for that ratio to get back to historical levels.

Risks:

Global liquidity and demand continue to face macroeconomic headwinds, which could put downward pressure on the price of silver. Silver continues to trade above its multi-year high but could fall back to $15 an ounce should headwinds continue to weigh on prices.

Three silver stocks to consider for your portfolio:

Pan American Silver (NASDAQ:PAAS) is a Canadian mining company based in Vancouver, Canada. The company has mines in Mexico, Peru, Bolivia, and Argentina. It produces both gold and silver as a part of its operations. The stock remains reasonably valued at 24x earnings, and witnessed strong results during the first quarter, with revenue coming in at 19% higher than the previous year, on the back of 4.6 million silver equivalent ounces being produced. The company currently has a dividend yield of around 2%, a little lower than what investors might like. Management has also reduced debt significantly, with debt to equity coming down to 0.01 for the most recent quarter. Therefore, there are very few issues other than the ability to manage the cost structure, which continues to weigh on earnings, and are currently keeping prices below their intrinsic value.

Pan American Silver’s management expects earnings to improve during the next few quarters, which could result in the stock price increasing once again. During the first quarter, multiple sites were affected by COVID which weighed down on production. But, from the second quarter onward production should increase substantially as old sites come back online, and new sites start production as well. Cost pressure continued to affect the bottom line for the company during the quarter but, management has guided that all-in-costs should reduce as operations consolidate, which should help improve profitability during the next few quarters.

The average analyst rating for the stock is $26, which would mean a 23% upside from these levels.

First Majestic Silver (NYSE:AG) is another Canadian silver-mining company with operations across Mexico and the United States. The company continues to increase operational capability as price and demand continue to support silver. The stock is down over 55% from its 52-week high as silver prices and management’s poor execution continue to weigh on the price.

First Majestic is expected to increase production by 30% for the year and expects to turn profitable for the year. In addition to increasing, production costs are expected to come down by 20% for the year, all of which bodes well for earnings and the stock price. The stock trades at 3x price-to-sales and forward price-to-earnings (P/E) of around 20x, which could be attractive if results continue to come in strong. Beyond earnings, the stock may be considered primarily asset quality with over 177 million ounces of silver equivalent metal content, the company has substantial book value as well.

The average analyst rating for the stock is $11 per share, indicating a 55% upside from these levels.

Endeavour Silver (NYSE:EXK) is a mid-tier silver metals and mining company. The company has 2.6 million silver equivalent ounces in reserve and up to 100 million in probable silver equivalent ounces. Endeavour Silver’s stock is down 60% from its 52-week high but continues to produce strong results that should help it get to a reasonable valuation over the next couple of quarters. The company continued to witness strong results, with revenue increase by 67% y-o-y for the first quarter. Analysts predict a forward P/E of 22-24x, which would mean the stock could rise significantly provided silver prices remain steady.

The average analyst rating for the stock is $6 per share, which would indicate around a 70% upside from current levels.