Life Cycles of the Resources Sector: Knowing the Stages and Getting In at the Right Time
Editor’s Note: It’s been a banner year here at Energy & Resources Digest.
We’ve more than doubled our readership in the past 12 months. We’ve broken new ground, covering 21st-century commodities and trends that most investment publications are ignoring…
But among the many great things that happened this year was Macro Strategist Eric Fry joining our ranks.
If you didn’t know, Eric is considered “America’s Top Trader” thanks to winning one of Wall Street’s most prestigious investment competitions. He beat out some of the most well-known and best-regarded money managers in the world.
His insights (including the one below) have been a breath of fresh air in this publication. Here he details the proprietary system he uses to anticipate explosive growth in certain sectors well before it happens.
– Patrick Little, Managing Editor
Resources investors, take note: Today, I’m going to tell you about the life cycle of stocks. Let me get right to the point.
Every stock, no matter the sector, goes through four stages. Understanding this cycle can pose significant gain opportunities – if you know when to buy.
The four stages generally look like this…
Stage 1 is when the life cycle begins. It’s what I call the “Cheap but Flat” stage.
At the first stage, stocks generally have low valuations and low momentum. It’s a frustrating combination, especially for value investors.
But Stage 2 is where things start to get a little bit more interesting…
Opportunity begins to emerge. The stock is still cheap, but it’s gaining momentum and starting to climb.
I call this the “Cheap and Moving” stage, and I like to think of it as the sweet spot. Essentially, it’s the ideal buy point where the big gain opportunities come alive.
When you buy stocks in the second stage of their life cycles, you have a very high chance of making money.
Eventually, however, the stock’s price begins to top out. It’s the result of moving too high too fast…
In short, its valuation is out of whack. And this happens when it cycles into Stage 3: “Expensive and Risky.”
Stage 3 is the most crucial stage in the life cycle. It’s when most investors make a devastating mistake…
They become attached to the stock. It has lots of momentum, it’s trading at an expensive valuation, and they want to hold it forever.
In some cases, the stock could even look like it’s going to run higher, and investors want to squeeze every drop out of it. But that’s where emotion outpaces logic. It’s deadly because the stock is entering a high-risk zone.
In short, the stock is nearing the end of its life cycle. And when this happens, it will eventually experience every investor’s worst nightmare: a correction.
That’s Stage 4.
As you can see from the chart above, this is when the price starts to tumble.
The Resources Market Is Hitting Its Stride
But what goes down is bound to come back up again – especially when it comes to resources. In fact, individual stocks (and broad sectors) go through these cyclical patterns over and over again.
Recently, I’ve found that the most lucrative opportunities happen to be in raw materials, precious metals and mining.
You see, the resources sector goes through a new life cycle about every six years. And at the beginning of 2016, a new one was just starting.
By identifying that the resource sector as a whole was entering a major upswing in its life cycle, I was able to find dozens of big winners. For example, the global miner Freeport-McMoRan (NYSE: FCX)…
In less than seven months, it rose an astounding 366%…
Eurasian Minerals (NYSE: EMXX) is another great example. Over roughly the same time period, it ballooned 294%…
These examples prove that when you know a sector is in the right stage of its life cycle, it’s really hard NOT to make a lot of money. Just a $5,000 investment into each of the companies I mentioned would have blossomed into more than $30,000.
But to replicate this kind of performance, you must be able to systematically identify stocks entering that Stage 2 sweet spot.
The good news is that 2016 was not the last time we’ll see resources entering the second stage of the life cycle. And I’ve already nailed down a few companies that are going to see explosive growth over the next couple of years…
P.S. Last year wasn’t the first time I’ve seen gains like these. In fact, I’ve been able to do it over and over again by using the proprietary investment system I built and refined over my 30-year career as a former hedge fund manager and boutique research analyst.
Most recently, I used my system to defeat more than 600 competitors in Wall Street’s most prestigious investment competition. Competitors included billionaire hedge fund managers like Bill Ackman, CEO of Pershing Square Capital Management; David Einhorn, founder of Greenlight Capital; and Mario Gabelli, chairman of Gabelli Asset Management.
This victory earned me the title of “America’s Top Trader.” Want to learn more about my victory and all about the “nuts and bolts” of my investment system? Click here.