SWC is next Apple, 20 Folds in 4 years!

I now put more than half of my portfolio in SWC, stillwater mining company. Incredible bullish fundamentals here, but few people know, because few people have any idea what is Palladium and Platinum, the main products of SWC. They do not know why palladium is bullish. At first look people are scared away by the seeming high P/E ratio of SWC, currently stands at 165. That makes SWC extremely cheap to buy here. Let me explain below.

SWC is the ONLY United States mining company that produces the precious metal palladium and platinum. The only other places that produce these two metal in significant amount are Norilsk in Russia, South Africa, and PAL in Canada.

If you bought stocks of Apple Computer, AAPL, on April 17, 2003, four years later now, you would have made 19 folds profit from your original investment. But SWC will be the next AAPL, meaning the stock price will increase 20 fold from current $12 a share, to $240 a share, in the next four (4) years.

How come? The current price/sales ratio of SWC, i.e., the ratio of stock price, divided by annual sales revenue per share, is very low. It currently stands at 1.71. A low price/sales of 1.71 and a high price/earning of 165.0, means only a tiny fraction of the sales revenue goes into the earnings. You divide the two ratios and get earnings/sales = 1.04%. So only one percent of the sales revenue goes into the earnings.

The beauty of bullish commodities like precious metal is that as metal price increases, the company does NOT need to increase production. It simply produces the same amount of metal, at the same cost, but any increase of sales revenue due to metal price increase directly goes into gross profit.

The current earnings/sales = 1% that means the price is barely high enough to pay for the cost. If the price just doubles, then sales revenue will double, but the cost remains the same. That means earnings/sales will improve to 50%. That is a huge improvement, 50 fold improvement, from 1%. Not only earnings/sales improves 50 fold, but the denominator itself, sales revenue, doubles. So it would actually be a 100 folds increase of earnings.

Think about it, it merely takes the metal price to double, to improve SWC's current P/E ratio by 100 fold, from 165.0 down to 1.65!!!

If the metal price further doubles, then sales revenue has quadrupled, with earnings/sales now stands at 75%. So that would be an improvement of 75% * 4 / 1% = 300 folds, of the net earnings. That means the P/E ratio will be pushed down to 165.0 / 300 = 0.55. Extremely low.

Of course the stock price of SWC would have to increase dramatically to bring P/E ratio to a number that makes more sense. How about the stock price increase 20 folds. That will then bring P/E to 0.55 * 20 = 11.00. That is a P/E number that looks more reasonable. But really that is still way too conservative. A stock that grows so rapidly really deserves a P/E several times higher than 10-ish. So SWC might actually increase more than 20 folds in 4 years!!!

Of course, that assumes that palladium price really does go up quadruple in 4 years, from current $375 an ounce to $1500 per ounce. Whether SWC can go up 20 folds in 4 years depends on this, and this alone, that palladium price MUST quadruple in 4 years. If palladium price does not move, then SWC is not going any where.

For palladium price to quadruple in 4 years, the price of the metal will have to increase 40% annually, or increase by 9% per quarter. Will this be possible? Palladium price has already doubled in the past two years! It only needs to keep this pace for four more years.

I will discuss why palladium price will keep increasing at rapid pace in the next article. But in short, it is a supply/demand thing. The supply is limited. The whole world produces no more than 7 million troy ounces of palladium per year. One troy ounce is 31.1 grams. What about the demand side?

1. The auto industry, which is the largest consumer of palladium, is increasingly switching away from platinum, which is now almost four times as expensive as palladium, and back to use palladium in their auto catalyst application.

2. The demand in the jewelry industry. Palladium jewelries are rapidly becoming ever more popular, especially in China. And it is picking up in the United States recently. I suspect that China is only a rehearsal and the real fun would be in the US and Europe market. The physics property makes palladium a suitable metal for jewelries. The lighter weight and affordability makes palladium the only plausible choice in many jewelry applications.

3. The dental application. Traditional dental filing material is a silver-mercury alloy based material. Mercury is extremely toxic. Modern technology found that a palladium based solution is much better and none-toxic. Japan has mandated that all dental fillings MUST be done using palladium. Other countries may follow suit and pass similar laws. Any one in the know will reject mercury and prefer palladium in dental care. There is not enough palladium even if a good fraction of the world's population demand palladium for their dental cares.

4. Investment demand. Palladium is one of the four precious metals. As US dollar and all the world's paper fiat currency loses their value over time rapidly. There are growing interest of investing in precious metals. Palladium market is extremely narrow. Even the smallest investment demand will cause significant market price rally, which in term will attract more interest demand. Recently Novartis Pension Fund in Switzerland announce that they will invest 1% of their portfolio in buying physical palladium. That would buy about 4.5% of the world's whole year output of palladium. This one fund purchase may be just the tip of iceberg. Investment demand like this will corner the market and cause palladium price to go sky high!!! Remember the Hunt Brothers and Silver Thursday?

I believe right now SWC is the best buy after its stock price has corrected and bottomed due to a recent insignificant earnings miss, after an incredible rally in the previous two months. The fall from $16.50+ to $11.20 is way oversold, on such a bullish stock.

This chart of palladium future clearly shows dramatically growing investment interest in palladium starting from the second half of 2003.

Read this web site to understand the important applications of palladium.
http://www.palladiumcoins.com/uses.html

USGS data on PGM metals.