Gold and oil companies will probably be worth owning until the end of time. The advent of mass adoption of cars in China and India will put a constant squeeze on the oil supply since all of the easily obtainable oil is gone. Gold is loved in many foreign countries, and the U.S. has a lot of gold bugs, too. Whether you think gold is worth owning or not, the demand is great, and profits can be made by owning certain gold companies.
How do you know how much a company is worth? This question needs to be answered before you buy shares in the company. You need to know its approximate value over the long-term and what its probable peak stock price will be. The first thing to look at is the current value of the company's commodity. Gold was selling for $1200 per ounce at the end of August 2010.
The second parameter is finding out how much proven gold a company has. Suppose a gold company has 6 million ounces of gold. It may take $500 to get the gold out of the ground and processed. Then, tack on another $100 for other expenses for a safe measure. The company's net worth would be $1200-$600 expenses per ounce of gold and multiplied by 6 million. This comes out to 3.6 billion dollars. Now, divide that by the number of shares in the company. If they have 100 million shares, the price per share turns out to be $36. When the price gets near $36 per share, you should sell unless the company has found another 6 million ounces of gold.
Another point to think about is whether your company owns all the gold or not. If another gold miner owns 50% of your favorite company, that will cut the maximum stock price in half. Click on the ticker symbols below to see price charts of the companies. Click on the company name to view the company's website.
On another subject, suppose a company's resources are not easily known, or you are thinking about buying a tech company whose only real metric is sales and possible future demand. If the company is increasing revenue by 25% per year and you assume the earnings are growing the same amount, then you could put a price target on the company reflecting a PE of 25. If a $20 company currently has a PE of 25, you could expect the price to increase to $25 in a year's time. This would be a healthy return on your money for the year.
However, if the current PE of the company is only 10, then the company is undervalued compared to growth, and the price of the company's stock could greatly increase. Using this same 25% growth company and figuring a target price to reflect the undervalue gives an entirely different picture of possible gain. You would take the $25 revenue increase price and multiply that by 2.5 to figure in a PE of 25, and that gives a new price target of $62.50. So, this $20 growing company that is undervalued could increase your monetary gain by over 200%!