We’re selling this loser in May but not going away

Published: May 16, 2024

By: Benj Gallander

Yes, it is May and the old adage, “Sell in May and go away,” is blooming like leaves. The primary question is: How effective is this method?

First, let us put it very plainly on the table, we do not believe in wholesale buying and selling. Our methodology has always been to be exceedingly selective on both ends of the deal. So, the idea of ripping apart a portfolio and tossing it into the wind on an annual basis makes zero sense from this angle.

Why are some people keen on it? While it is true that the U.S. stock market has underperformed from May to October since 1950, on average, it has remained positive for whole years to the tune of 1.8 per cent. And it’s done even better over the past 10 years, notching average annual gains of about 4.4 per cent. Hmm, that is clearly indicative that, overall, being patient and not doing a heck of a lot is a good policy.

While buying at this time of year is not something that we generally do, preferring – as our followers know – to wait until tax-loss selling at the end of the annum to acquire positions, now is when we are in tax-loss selling mode. Many investors wait until the end of the year to do this, but that is when so many people are rushing their losers out the door, supply increases, thereby lowering the price that can be obtained. Not a good strategy to be sure.

One that Benj just sold is Gold Resource Corp. GORO-A. Purchased in 2021 at US$2.66 with an initial sell target of US$7.24, this one that we wrote about in early 2023 has been somewhat of a disaster. It went out the door at 50 US cents.

When our interest was being perked to buy, Benj met with chief executive officer Allen Palmiere and chief operating officer Alberto Reyes. Neither did a sales job, as many executives in the commodity patch do, touting their projects as the next humongous thing. Their presentation appeared realistic.

The financials did look good for this entity. There are not many companies in the commodity patch that have zero debt and a healthy bankroll.

But the company has been hemorrhaging cash. In 2021, there was north of US$37-million in the kitty. Today it is less than US$5-million. Due to the bleed, the company eliminated its dividend. While it was a wise move that has saved some money, much is needed for the advancement of the company’s Back Forty Mine in Michigan. It is estimated that US$325-million will be necessary for capital expenditures. That does not include the US$100-million that previous owners have already sunk into this property.

The enterprise’s primary gold play is the Don David Gold Mine in Oaxaca, Mexico, which achieved commercial production in 2010. The mine life expectancy is less than five years, but it seems reasonable that will be extended, as has happened regularly in the past.

One aspect of GORO that discouraged us from averaging down was that while the stock price was being whacked, insiders were not buying. That, in itself, speaks volumes perhaps about their expectations. Meanwhile, they have fattened up on shares that they acquire for free. One might ask: Why pay when access can be given for nothing?

When writing about this enterprise in the past, one conjecture was that a suitor might come calling. Normally they do that at a premium to the trading price. That is certainly not out of the question for this company.

When investing in what is primarily a gold enterprise, naturally the outlook for the gold price is a major consideration. At this point, we are somewhat agnostic about the company’s future valuation, as it does not seem particularly low or high. Worth noting, however, is that the gold price just hit a record and December, 2025 gold futures are currently going for better than US$2,540 an ounce, a stretch upward from the current price.

Often people who were considering a safe haven away from currencies would look toward gold. Now, cryptocurrency is also in the mix. We believe that the shiny metal has more competition, which should mute the upside.

Psychologically, it is rarely easy to take a loss, but doing it is a key component of the investment game. It allows for less tax to be paid, thus money goes back into the pocket to fight another day.

Gold Resource has potential, but it is far from a slam dunk. Bankruptcy is not out of the question. Taking the loss gives a guaranteed return on the investment, as less money will have to be paid to the Canada Revenue Agency, which will reduce our very solid gains. The stock will remain on our watch list and a re-entry toward the end of the year is not out of the question. Meanwhile, we are selling a loser in May and going away.