It’s been a tough couple of weeks for silver (SLV) investors as the metal is down more than 20% from its highs, only two short months after chants of $50.00/oz silver before year-end. Unfortunately, investors often flock to the high-cost silver miners to get leverage on the metal when the wild prognostications show up, but this leverage works both ways. Endeavour Silver (EXK) investors that were late to the party have learned this the hard way, with the stock down more than 25% from its highs, and now threatening to fill the mid-July gap. While this drop has removed the stock’s overbought condition, the valuation is still quite lofty, with the stock trading at over 20x forward earnings. I continue to see the stock as an Avoid in favor of producers with higher margins and more attractive valuations.
Just over two months ago, I wrote on Endeavour Silver and warned that it was a terrible time to put new money to work as sentiment for silver was through the roof, and the stock was more than 80% above its 200-day moving average. Bullish sentiment was at its highest level in more than four years, investors were flocking to the metal in droves, and it’s never a good idea to pay up for a stock when there’s the chatter of an imminent double in the price of a commodity or asset class.
As we can see, Endeavour Silver has now closed some of the gap with its 200-day moving average but remains more than 60% above this level as of Monday’s close. There is no reason that the stock needs to trade back down to its 200-day moving average, but we’ve seen quite a bit of technical damage during this correction. Before digging into the technical picture, though, it’s worth taking a look at the valuation to see if it’s moved to attractive levels following this sharp decline.
If we look at the chart below, we can see that Endeavour Silver has one of the weakest earnings trends in the sector, with net losses per share the past two years, and estimates that the company will post more net losses in FY2020. Fortunately, FY2021 is expected to be a much better year, with the company finally benefiting from a surge in silver prices. FY2021 estimates have increased from $0.02 in March to $0.16 most recently, putting Endeavour Silver on track for a new multi-year high in annual earnings per share. However, it’s worth noting that this is the furthest thing from a sector leader, as the compound annual earnings growth rate over the past eight years will be 4% even if Endeavour Silver hits these estimates.
While some investors might argue that Endeavour Silver must be dirt-cheap if its earnings estimates are up 700% in the past six months, a look at the valuation would suggest differently. The below chart shows a snapshot of four miners currently, which all have solid long-term track records of increasing shareholder value. Endeavour Silver is the odd one out, with massive share dilution, no positive earnings to speak of, and no dividend. Despite this fact, Endeavour Silver trades at a significant premium to Newmont Corporation (NEM), B2Gold (BTG), and Kirkland Lake Gold (KL).
As shown above, the average forward P/E ratio for these three companies is 14.43, and Endeavour Silver trades at a forward earnings multiple of 20.1. Therefore, investors can either buy proven leaders with healthy dividend yields at very reasonable valuations or pay a 40% premium for a stock that has seen a negative total return over the past decade. While this does not suggest that Endeavour Silver can’t bottom out soon and bounce after a sharp 25% decline the past two months, it’s hard to argue that it’s one of the best areas to park some money if one is looking to invest in the sector.
(Source: TC2000.com)If we look at the technical picture above, we’ve seen a dearth of buying pressure over the past few weeks, with the majority of up days showing well below-average volume. Meanwhile, we’ve seen quite a few higher volume selling days, with significant distribution showing up in early August at $4.50 – $4.75. Unfortunately, given the parabolic rise in the stock during Q3, we did not see any support levels built on the way up, which often leads to sharp declines on the way down. Currently, the only meaningful support level is at $2.85 weekly, which coincides with the multi-year breakout in the stock earlier this year. This doesn’t mean that the stock has to come all the way back to $2.85 before finding buying support, but it does suggest that this sell-off likely has further room to go still.
In terms of upside potential, I would expect the $4.65 level to be a brick wall of resistance for Endeavour Silver, as we saw a significant expansion in volume here, with several very weak closes. This suggests that there were some heavy sellers in this area, and it’s quite possible that unsuspecting retail buyers got trapped here. If the price were to return to this area, I would not be surprised to see retail investors rush to get out at break-even, after having just sat through a near 30% loss in less than two months. Therefore, if we do see a sharp rally before year-end for Endeavour Silver, I believe any rallies to $4.60 would be a selling opportunity. It’s worth noting that this area could be a tricky spot from a valuation standpoint as well, as the stock would be trading just shy of 30x FY2021 annual EPS estimates ($4.65 / $0.16).
Endeavour Silver has certainly seen an improved investment thesis with the 200-day moving average for silver up from $16.50/oz in December to above $19.25/oz currently. However, the company has industry-lagging margins, and the valuation is nowhere as attractive as other precious metals names. Adding to these issues, the stock now has strong resistance at $4.65, and no meaningful support levels until closer to $3.00. Therefore, I continue to see the stock as an Avoid in favor of more attractively valued producers like Kirkland Lake Gold. I would view any rallies above $4.60 as selling opportunities.
Disclosure: I am/we are long KL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.