Newmont Goldcorp (NEM) has a beta of -0.05 and thus it is one of the three stocks of the S&P 500 that have a negative beta. This means that the stock tends to rise when the S&P declines and vice versa. This feature offers certain advantages and hence investors should not dismiss this type of stocks. Nevertheless, as Newmont Goldcorp is trading near its 5-year high, the big question is whether the stock is attractive.

Beta: What It Means, And Why It's Important

The volatility of a stock against a benchmark, usually the S&P 500, is called beta. A beta of 1.0 means that the stock moves equally with the S&P. High-beta stocks outperform the index during good periods but they underperform during bear markets or sell-offs. On the contrary, low-beta stocks are more resilient and thus they outperform the market during rough periods.

Many investors erroneously ignore this parameter of their stocks, claiming that they have a long-term investing horizon and hence they ignore the swings of their stock prices. Unfortunately, this is much easier said than done. During bear markets, most investors cannot tolerate the bleeding of their portfolio. Consequently, they sell many of their stocks, usually the ones with the highest beta, and these losses have a great impact on the long-term returns of their portfolios. On the other hand, low-beta stocks are resilient during bear markets and outperform the market, thus making it easier for investors to keep these stocks even during fierce periods. This advantage should not be underestimated.

Newmont Goldcorp has a slightly negative beta thanks to the nature of its business. During market sell-offs, the price of gold usually increases, as investors view gold as a safe haven during market turmoil. This behavior of the price of gold results in a slightly negative beta of Newmont Goldcorp, whose earnings are closely tied to the price of gold.

Business overview

Newmont Goldcorp operates gold and copper mines on four different continents. The company, which resulted from the merger of Newmont with Goldcorp in April, is the largest producer of gold by market capitalization, output, and reserves.

In the second quarter, Newmont Goldcorp grew its production 36% over last year’s quarter thanks to its recent acquisition. Its production cost rose to $1,016 per ounce due to the merger but management expects improved performance in the second half of the year thanks to the rally of the price of gold since the end of the second quarter and synergies from the integration of the two companies. The company is on track to achieve $200 million in annual run-rate synergies by the end of the year.

Growth prospects

The performance record of Newmont Goldcorp is disappointing, as the earnings of the company are greatly affected by the dramatic swings of commodity prices. The company posted record earnings per share of $4.40 in 2011 thanks to the all-time high price of gold in that year but it has never approached that level of profitability since then. Its earnings per share have been lower than $1.50 in each of the last six years and they are expected around $1.30 this year. For every $100 change in the price of gold, the free cash flows of Newmont Goldcorp change by about $470 million, which is almost 50% at their current level. It is thus evident that the price of gold has a dramatic effect on the cash flows and the earnings of Newmont Goldcorp.

The company has completed three major growth projects on schedule and within budget this year. It has also completed 9 growth projects with a rate of return above 30% in the last few years. Nevertheless, while Newmont Goldcorp has a promising pipeline of additional growth projects, we expect its additional output to mostly offset the natural decline of its existing fields. As a result, we continue to expect its earnings to be almost fully determined by the underlying commodity prices.

Valuation & Dividend Analysis

Newmont Goldcorp is offering a 1.4% dividend yield. While this yield is higher than the yield of most gold producers, it is lower than the 1.8% yield of the S&P. Even worse, the dividend of Newmont Goldcorp is extremely volatile, as it is closely tied to the prevailing prices of gold and copper. Therefore, as the dividend of the company is unreliable, income-oriented investors should avoid the stock.

Newmont Goldcorp is currently trading at an almost 5-year high and at a forward price-to-earnings ratio of 30.0. On the one hand, the excessive earnings multiple has resulted from the market’s enthusiasm over the recent mega-merger and the rally of the gold price in the last five months. On the other hand, this is the richest valuation of the stock in more than a decade. 

Final thoughts

Newmont Goldcorp is one of the three stocks of the S&P that have a negative beta. This characteristic is valuable during bear markets or market sell-offs. As a result, investors looking to gain inverse exposure to the S&P 500--such as those expecting a market downturn in the years ahead--should consider negative beta stocks such as Newmont Goldcorp.