Dundee analyst, , who covers the metals and mining sector, earned this year's Thomson Reuters Analyst Awards.Getty Images/iStockphoto
In January, 2015, Eldorado Gold Corp. raised the ire of investors when it cut its production estimates and forecasted a big jump in costs. The obligatory wave of cuts to stock price targets by analysts following the company came immediately afterward. But the consensus recommendation on the stock was still bullish.
There was trouble looming, however, in Greece, which the market did not fully appreciate, said Josh Wolfson, an analyst at Dundee Securities, who downgraded Eldorado to a "sell" on Jan. 21, 2015, as a result of the revised guidance. The following weekend, the left-wing Syriza party was voted into power in Greece. The new government promptly announced a review of the planned $1-billion (U.S.) expansion of Eldorado's gold mine in northern Greece.
That timely downgrade was one of the calls that earned Mr. Wolfson the distinction of this year's top stock picker in the Thomson Reuters Analyst Awards. Formerly known as the StarMine awards, they score sell-side equity analysts based on their investment recommendations for the companies they cover.
Each analyst's ratings are compiled to create a hypothetical portfolio. Performance is measured by the return that portfolio would have earned if an investor had followed the "buy" and "sell" recommendations.
Mr. Wolfson, who covers the metals and mining sector, beat his industry benchmark by the widest margin, generating an excess return of 14.4 per cent in the 2015 calendar year.
He outperformed his field largely by knowing what to avoid.
The mining sector tends to see a consistent positive bias. On top of the gold bug narrative that keeps many investors optimistic about the sector by default, the sell-side stock analysis business is one that tends to issue far more "buy" ratings than "sell."
"Our attempt is to disconnect from those biases and look at the financials as objectively as possible," Mr. Wolfson said.
Going into 2015, the mining sector was locked in a persistent slide that had lopped more than half the value off the S&P/TSX composite materials sector index over the previous four years, while the spot price of gold had recently dropped to $1,140 an ounce, its lowest price in almost five years.
In that environment, understanding credit risk became crucial to stock picking, Mr. Wolfson said.
"With the collapse of gold prices, you had the compounding effect of operating leverage from mine sites and financial leverage carried on balance sheets. So the risk of [loan] covenant breaches became a genuine threat. Companies had to defer capital projects, cut costs aggressively, and in some cases sell assets or raise equity," he said.
In January, 2015, Yamana Gold Inc. announced an agreement to raise up to $300-million (Canadian) to help reduce debt, which went some way to improving the company's balance sheet. But the company was still highly leveraged, and with a challenging free-cash-flow outlook, Mr. Wolfson said. His "sell" rating on Yamana proved astute as the stock declined by 45 per cent through 2015.
As for Eldorado, positive sentiment last year was supported by a recent rally in gold, which by mid-January had risen by nearly 15 per cent over the previous two months, as well as faith in the company's track record of operating in challenging jurisdictions.
"People were inclined to be biased positively because of that and give management the benefit of the doubt," Mr. Wolfson said. As a result, he said the stock price failed to fully recognize the level of political risk in Greece, putting a question mark on assets accounting for one-quarter of Eldorado's valuation.
"There was a massive potential risk profile ahead for the company," Mr. Wolfson said. From the time he downgraded Eldorado until the end of the year, the company's shares declined by 46 per cent. He has since restored his "neutral" rating on the stock.
For a full list of this year's winners, click here
Tim Shufelt