To The Moon

Overview of Strategy

On November 12, 2024, I sold a put option on Barrick Gold Corporation $Barrick Gold Corp(GOLD)$  with a strike price of $16.50 and an expiration date of November 29, 2024, collecting an option premium of $25. At the time, Barrick’s stock was trading at $17.28. The primary goal of this strategy was to generate income from the premium, while potentially positioning myself to acquire Barrick shares at a discounted price if the option were assigned.

My decision was based on Barrick Gold's attractive valuation metrics and its strong relative position in the industry. By analyzing key financial ratios, I concluded that the stock was undervalued compared to its industry peers, presenting a promising investment opportunity.

Analysis of Barrick Gold’s Valuation Metrics

Several financial metrics indicated that Barrick Gold was trading at an attractive valuation relative to its industry:

P/E Ratio: Barrick's P/E ratio of 10.21 was notably lower than the industry average of 13.21. This suggests that Barrick was undervalued in terms of earnings, providing an attractive entry point for a value-oriented investor. Historically, the stock’s Forward P/E ratio ranged from a high of 22.29 to a low of 10.19, with a median of 14.28, reinforcing the idea that Barrick was trading at the low end of its historical range.

PEG Ratio: Barrick’s PEG ratio of 0.31 was below the industry average of 0.45, indicating that the stock offered strong value relative to its expected growth rate. Over the past year, the PEG ratio for Barrick ranged from 1.56 to 0.31, with a median of 0.98. This low PEG ratio highlighted Barrick's growth potential, combined with a relatively low price, which adds to its appeal for growth-at-a-reasonable-price (GARP) investors.

P/B Ratio: Barrick had a P/B ratio of 1, compared to an industry average of 1.71. Over the last year, Barrick’s P/B ratio fluctuated between 1.14 and 0.77, with a median of 0.94. The P/B ratio at this level implied that Barrick was trading close to its book value, suggesting limited downside and a margin of safety.

P/S Ratio: Barrick’s P/S ratio of 2.61 was lower than the industry average of 2.99. Since the P/S ratio is less influenced by accounting policies and provides a clearer view of a company’s revenue generation, this indicated that Barrick’s stock was relatively inexpensive based on sales.

P/CF Ratio: Barrick's P/CF ratio of 9.21 was below the industry average of 16.69, highlighting that Barrick was undervalued based on its cash flow. Over the past year, Barrick's P/CF ratio had been as high as 15.14 and as low as 7.45, with a median of 8.95. This metric underscored Barrick's ability to generate operating cash flow, which adds to its fundamental strength and further justifies the investment decision.

Reflection on the Strategy

Premium Income: Selling the put option at a strike price of $16.50 with the stock trading at $17.28 allowed me to collect a premium of $25, which effectively lowered my break-even point to $16.25 ($16.50 strike price - $0.25 premium). This premium provided immediate income, which enhanced the overall return on investment and offered some cushion in the event of a moderate decline in Barrick’s stock price.

Valuation-Based Entry Point: By selling a put option, I positioned myself to acquire Barrick shares at $16.50 if assigned, which was a favorable price based on the stock’s fundamental metrics. Given Barrick’s attractive valuation ratios—particularly the low P/E, PEG, and P/B ratios—this strike price aligned with my goal of entering a value-oriented investment at a reasonable price.

Defensive Play with Upside Potential: Barrick’s low valuation metrics relative to its industry suggested a margin of safety, making this put-selling strategy a defensive play. Barrick's low P/CF ratio, in particular, pointed to strong cash flow generation, which is crucial in the cyclical mining sector and a strong indicator of the company’s financial stability. Additionally, Barrick's operational strengths and growth outlook, supported by rising production, make it a suitable candidate for potential capital appreciation over the long term.

Risk Management: Selling a put option allowed me to earn a premium while waiting to see if the stock would drop to a more attractive purchase level. With the stock trading at $17.28, there was a cushion of about 4.5% before it reached the strike price of $16.50, offering some protection against a minor price decline. However, if the stock were to drop below $16.50, I was comfortable owning it at this level, given Barrick’s strong fundamentals.

Outlook and Insights

Looking ahead, Barrick’s fundamental strengths—such as its competitive P/E, PEG, P/B, P/S, and P/CF ratios—support a bullish long-term outlook. If assigned, I would hold Barrick shares with the expectation that the stock’s value metrics would eventually reflect in its market price, particularly as gold prices remain favorable and Barrick continues to expand production.

Barrick’s valuation profile suggests that it is well-positioned to weather downturns and benefit from future gold price increases. Investors looking to implement similar strategies should monitor Barrick’s valuation metrics and macroeconomic factors influencing gold demand, including inflationary trends and currency movements, as these are significant drivers for gold prices and the stock’s performance.

Conclusion

Selling the put option on Barrick Gold at the $16.50 strike price was a strategic decision driven by Barrick's attractive valuation metrics. The premium income added immediate value, while the prospect of acquiring the stock at a discounted price aligned well with my long-term investment goals. Barrick’s strong cash flow, low valuation ratios, and solid growth prospects make it a compelling investment for a value-focused strategy.

This put-selling strategy allowed me to balance income generation with potential capital appreciation. If assigned, I am confident in the decision to own Barrick shares, given its fundamental strengths and position within the mining industry. This approach underscores the effectiveness of option strategies in generating income while offering a pathway to own undervalued assets in cyclical sectors.

$GOLD 20241129 16.5 PUT$