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All-Star Analyst

How a top stock picker mines the universe for a winner Add to ...

For some stock pickers, the process of unearthing winners involves sifting through the mathematical minutiae of valuation multiples. Count on a guy named Cosmos to see the bigger picture.

"In our universe, sometimes stocks are cheap for a reason, and sometimes stocks are expensive for a reason," says Cosmos Chiu, small-cap gold mining analyst at CIBC World Markets Inc. In a segment of the mining market that can be littered with seeming bargains that have in fact earned the market's disfavour through failing to deliver on their promise, he'd put his money on strong management and superior growth potential over cheap valuations every time.

"The last thing you want is to miss out on the gold price rise because a company has operational issues."

It's hard to question Mr. Chiu's approach, given the success it has had during gold's rally in the past year. His knack for recommending winners has given him the top ranking among Canadian gold mining analysts in terms of outperformance of his picks over the market, based on analyst-performance analysis from stock market analytics service StarMine Corp.

StarMine's data show that Mr. Chiu's stock recommendations (covering 13 Toronto Stock Exchange-listed companies) have generated an excess return of 24.1 per cent above the overall Canadian mining sector in the past 12 months. That's tops among 68 Canadian mining analysts tracked by StarMine.

StarMine's formula for measuring industry excess returns essentially creates a "long-short" investing strategy based on each analyst's recommendations - emulating the effect of going long the stocks that the analyst rates "buy" and going short those that he or she rates "sell." The analyst gets credit for the returns in excess of the industry-wide benchmark for all the "buy"-rated stocks; he or she also gets credit for the amount a stock's returns fall short of the industry benchmark for all the "sell"-rated stocks. ("Strong buys" and "strong sells" receive double credit.) Stocks rated as "holds" or "neutral" receive no score in this system. So, if an analyst's "buy" recommendations generally outperform the benchmark and his or her "sell" recommendations generally underperform, he or she will receive a high industry-excess-returns score.

"This is similar to the rationale we use when handing out our StarMine Awards each year," says Tim Gaumer, director of fundamental research at Thomson Reuters, which operates StarMine. (StarMine hands out annual awards for the top analysts in 15 regions of the world, including Canada. Last year's award for the best stock picker in Canada went to Adam Twa, an oil and gas analyst with Peters & Co. in Calgary, whose recommendations beat the industry benchmark by 20.9 per cent.)

StarMine also gives annual awards for excellence in another facet of stock analysis - accuracy of earnings estimates. For many quantitative-focused investors, an analyst's ability to predict earnings is considered much more important than a knack for recommending winners - in part because it's a more useful tool for their quantitative analysis of stock valuations, and in part because it's simply a more consistent way of measuring an analyst's performance than is the fickle art of stock-picking.

Fortunately for Mr. Chiu, though, he's proven good at both in the past year. His earnings-accuracy rating for the past four quarters ranks third among Canadian mining analysts.

"Most analysts are skilled at either estimates or stock picking. It is more unusual to find someone who excels at both, as Cosmos does," Mr. Gaumer says.

Mr. Chiu's current top picks on his coverage list - all of which he rates "outperform" - are producers Semafo Inc. , Aurizon Mines Ltd. , Silver Wheaton Corp. , and exploration plays Fronteer Gold Inc. and Orezone Gold Corp. .

When looking at producing gold juniors, Mr. Chiu says he always starts by looking for "good production history" and "strong management."

"But that's not enough," he says. "You have to have potential for production growth. We're in the growth business."

He adds that an attractive producer should also have multiple potential mining properties rather than a single project, to minimize what he calls "single-asset risk" - the chance the entire company could be brought down by one failed project.

Strong management is also a key in exploration and development companies, he says. But with these earlier-stage mining plays, timing is pivotal to the decision on recommending an investment.

"You want to get in early," he says. "Sometimes, there's a lot of euphoria - those exploration companies can get overvalued. Don't chase it."

If you miss the early window, he says, you're better off waiting until an explorer moves on to the development stage - when the geological studies on the property are more complete and financing is in place, thus reducing much of the risk.

And ultimately, nothing beats doing your homework on a stock.

"I spend 20 to 30 per cent of my time travelling - going to mine sites," Mr. Chiu says. He estimates that he spends another 20 to 30 per cent of his time talking to management, listening to company conference calls and attending corporate presentations at conferences.

"Due diligence is a big part of our job."

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