Gold and Precious Metals

Bear of the Day: First Majestic Silver (AG) – January 23, 2024

Company Overview

Zacks Rank #5 (Strong Sell) stock First Majestic Silver (AG) is a Canadian-based mining company focused on exploring, developing, and producing silver and other precious metals. The company operates predominately in Mexico and owns several silver mines, including the San Dimas, Santa Elena, and La Encantada silver mines. First Majestic Silver is known for its focus on silver production, and the company plays an important role in the global silver mining industry. The company’s operations involve extracting and processing silver ore to produce silver bullion, which contributes to meeting the demand for silver in various industrial and investment applications.

A Deflationary Environment is a Potential Headwind for Stores of Value

In 2022, inflation hit 40-year highs. However, since the headline-grabbing number was released in 2022, the U.S. Federal Reserve has gone on an interest rate hiking crusade and has broken the back of inflation. According to the Consumer Price Index (CPI), the inflation rate has slowed from near-double-digits to a little more than 3% annually. In addition, rent prices (an important proxy of inflation) dropped by a robust 8.8% in the most recent quarter – another sign inflation is moving in the right direction.

Where does silver come in? Silver miner stocks may underperform in a deflationary environment because investors often see the commodity as a hedge against inflation. Furthermore, deflationary pressures may lower commodity prices overall, affecting the profitability of silver mining operations.

Relative Weakness and Choppy Price Action Equate to Opportunity Cost

The old Wall Street adage says,“The trend is your friend.” Unfortunately for AG investors,the stock has been trendless for years and has exhibited relative weakness over the past three years. AG is down a painful 65% over the past three years, while the S&P 500 Index is up 24.7%. In other words, recent history tells us that investors are achieving higher returns with less risk by simply investing in a basket of diverse industries.

Wall Street is Bearish

Years of proprietary research at Zacks tells us that earnings estimates are one of the best ways to predict future stock prices. In the past 90 days, Wall Street has revised AG consensus estimates lower. To make matters worse, AG has a poor EPS surprise track record – the company has missed Zacks Consensus Estimates in 10 of the past 11 quarters (the opposite of what investors want to see.)

Bottom Line

A deflationary environment poses a headwind for silver miner stocks such as Zacks #5 (Strong Sell) stock First Majestic Silver. With a recent history of relative weakness, choppy price action, and a bearish sentiment on Wall Street, AG investors may need to carefully assess the risks and consider the impact of deflationary pressures on the profitability of silver mining operations.


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