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« Endeavour Silver Corporation: A Silly Season Buy? | Main | Silver Prices Recovering After Drop and Our BUY Signal »
Wednesday
Aug292007

Silver Wheaton: Approaching Buying Opportunity

We wrote about how certain silver stocks were approaching a good buying opportunity and to follow that articles up, we have given BUY signals on Silver Standard Resources and Pan American Silver.

Silver Wheaton: Approaching Buying Opportunity

As readers of The Silver Prices Newsletter will know, we saw an ascending triangle formation in Silver Wheaton and said the stock was due to break up. When it did, we signalled to take profits at $13.65 as we felt that Silver Wheaton was going to fall back to at least $12.50.

However, when SLW did not immediately fall back and went on to form a head and shoulders formation we thought it would fall still further, at least another dollar from our $12.50 target. Silver Wheaton has done just that, and appeared to find some support on its 200 day moving average line. However yesterday we saw trading in New York take Silver Wheaton down below its 200dma and it closed at $10.63 yesterday.

Many readers have been asking, “Why not buy back now?” This is a very good point. If we bought back the shares we sold at $13.65 at $10.63, we would be locking in a 22% discount. Therefore we have the option to either purchase back the same amount of shares we sold at a lower cost, or buy a larger position at the same cost. For every share we sold at $13.65 (roughly 50% of our entire position in Silver Wheaton) we can now buy 1.28 shares at $10.63. So that means we can increase that position by 28% and as we sold 50% of our position that means our overall position in Silver Wheaton could increase by 14%. Alternatively, the excess cash could be used to invest in other silver stocks.

So why aren't we buying back our shares and signalling a BUY again on Silver Wheaton?
The answer is simple. When we have the cash on the sideline, we must decide which is the best possible investment for that cash. We must determine which strategy is going to be the most profitable. If we think that one plan is going to be more profitable than the another plan, then we must go with the most profitable choice. It is these choices that keep us in business, keep the bills paid and put food on the table. Currently, we feel that other silver stocks offer better value than Silver Wheaton. Although it has broken its 200dma and it is at a great discount, many other silver stocks are way below their 200dma lines, such as SSRI and PASS, which we have already given additional BUY signals on. However there are other silver stocks in our portfolio, that we feel offer more upside in the near term than Silver Wheaton, and therefore we must choose those stocks over SLW.

That is not to say that we will never purchase our shares back, we intend to do so at some point as we really like the unique business model that Silver Wheaton uses and the company has very good management and fundamentals. We will signal a BUY on Silver Wheaton when we feel that it offers the best value in the silver market. Stay updated on our all signals and the silver market by subscribing to our FREE Silver Prices Newsletter.

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Reader Comments (2)

1st. Many thanks for your work and insight.

2nd. Some people suggest buying the stocks that perform the best (go down the least) in a downturn, suggesting they will be the strongest stocks in the next upleg. Your reference in the Silver Wheaton discussion today suggests that SSRI and PAAS, which are further below their 200-day moving averages, represent a better discounted buy.

I see merit in both thoughts, but wondered if your experience indicated one approach has better results than the other, or perhaps one works better trading short-term, and one does better in a longer term appraoach.

Thanks for any thoughts......

August 29, 2007 | Unregistered CommenterGreg

In this instance we have taken the view that all 3 stocks are ‘quality’ stocks and that as both SSRI and PAAS have been hit the hardest they will bounce back to where they were giving us a better bang for our buck.

After that short-term gain we would need to evaluate the situation again. The important thing however is to get the direction right and find a vehicle of quality to make the best of it.

SLW will do well; we are just trying to pick the best entry point, however if SLW is a favourite of yours please don’t be put off by what we think.

August 29, 2007 | Unregistered CommenterSilver Prices

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