An easy way to analyze if the markets are overvalued is by looking at the Warren Buffett indicator also known as the market cap to gross domestic product (GDP) ratio. According to Warren Buffett, if this ratio is over 100% markets are trading at a premium and vice versa. Currently, the market cap to GDP ratio of the S&P 500 is close to 200% and might be poised for a correction. However, as it’s impossible to time the markets, how do you invest right now?
The S&P 500 and the Dow Jones Industrial Average indices touched record highs yesterday. On the other hand, the global economy continues to remain sluggish. The multiple variants of the dreaded virus, coupled with the slow rollout of vaccines as well as partial lockdowns imposed all around the world have meant consumer spending will continue to remain subdued in the near term. Companies in the airline, retail, and hospitality sectors might remain under the pump.
Investors might argue that the equity markets have been propelled by technology stocks in the last year. As people were confined to their homes, demand for technology products in the e-commerce, cloud computing, collaboration, and gaming verticals gained significant momentum.
You can identify value stocks such as Barrick Gold
The Oracle of Omaha has always been a value investor. It means Buffett identifies companies that are trading at a discount to their intrinsic value. These stocks have the potential to recover and derive market-beating returns in the long run.
As seen earlier, the markets have gained momentum on the back of large-cap tech stocks. It means companies in other sectors have largely underperformed the market. Investors need to take a long-term view and buy undervalued stocks that have multiple secular tailwinds.
One undervalued large-cap stock that investors can look to buy right now is mining giant Barrick Gold (TSX:ABX)(NYSE:GOLD). The yellow metal should gain in popularity in case markets turn turbulent. Currently, gold prices are under pressure due to rising bond yields. However, investors are also worried about inflation which makes investing in gold all the more lustrous.
There are several benefits to buying gold stocks rather than physical gold. One of the most important advantages is that mining companies offer the potential of leveraged upside compared to the price of gold. As prices rise, mining companies can increase their gold production and improve the top line.
Barrick Gold is one of the largest gold mining companies in the world aims to keep operational costs low. The company expects its all-in sustaining costs to fall from $1,000 per once in 2020 to $800 per ounce in 2025. It also expects to average about five million ounces of gold each year through 2030.
Over the years, Barrick Gold has focused on reducing its debt and lowering interest costs providing it with financial flexibility and a stronger balance sheet.
The Foolish takeaway
Barrick Gold generated US$3.4 billion in annual cash flows in 2020 and ended the year with zero debt. The company is trading at a forward price to earnings multiple of 15.5. Comparatively, its adjusted earnings per share are forecast to grow at an annual rate of 24% in the next five years.
Wall Street has a 12-month average target price of $31 for Barrick Gold stock which is 50% higher than the current price.
Barrick Gold’s attractive valuation, low cost of production, and robust financials make it a top bet in a market that is volatile.
Are you a fan of value investing?
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