This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Silver Stocks: Long/Short Strategy

Stocks in this article: SLW SSRI ABX

NEW YORK ( TheStreet) -- Our top silver stock pick for months, Silver Wheaton (SLW), has been the top gainer and Silver Standard Resources (SSRI) has been the top loser among the silver stocks, year to date.

Based on our outlook, buying Silver Wheaton and shorting Silver Standard Resources will likely generate more gains on a risk-adjusted basis than investing in any of the silver stocks. For 2010, Silver Standard is estimated to report a loss of 3 cents per share, in comparison to the earnings of 64 cents per share for Silver Wheaton, according to analysts polled by Bloomberg.

Silver Wheaton's production is expected to increase 35% this year following the acquisition of Barrick Gold's (ABX) silver mines and Silverstone Resources this past year. The silver miner expects to increase annual production at a CAGR of 23.7% until 2013, positioning itself among the world's top silver producers. The miner's production costs will continue to be below the industry average, benefiting from the 13 silver purchase agreements that allow the purchase of production at a low fixed cost.

Investors remain cautious about Silver Standard, even after the appointment of a new president and CEO in the last week of May. Although the company has seen some improvements since the resignation of the former president and CEO in January, the stock continued its decline. The company transitioned from a development company to a producing company this year. Robust second-quarter results and the reiteration of full-year guidance will be critical in rebuilding some of the confidence that has been lost. Hence, short positions in the stock must be verified on the announcement of results.

In addition, investors will remain cautious on the company's start-up operations experience and capability of delivering on the Pirquitas mine. Also, the company's profitability from Australia operations will decline on the country's "super" profit tax, which will impact overall profits of the company.

According to TheStreet Ratings, the stock is graded "D" (Sell), in comparison to the "B" (Buy) for Silver Wheaton.

Result of Long/Short Strategy on Year-to-Date Performance

If an investor had invested 50% in buying SLW and 50% in shorting SSRI early this year, the absolute return for this portfolio would have gained 26.3% with no sector risk. In comparison, the S&P 500 and silver for spot delivery New York Mercantile Index gained only 0.08% and 10.9%, respectively, year to date. The beta for the long/short portfolio would have been -0.04, calculated as the weighted average of the two betas, much better than SLW's 1.22 and SSRI's 1.31.

In a beta-zero strategy, the portfolio is constructed to have zero beta. In order to achieve zero beta for the portfolio, investors should have invested 51.8% in a long position of SLW and 48.2% in a short position of SSRI, early this year. Absolute return of this portfolio would have been 26.7%, which becomes a risk-adjusted return of the portfolio, since the beta is zero.

Silver Wheaton has been the star performer among silver stocks, surging around 38.1% year to date. On a risk-adjusted basis, the stock outperformed the S&P 500 index during the past six months. Other major silver producers, Compania de Minas Buenaventura (BVN), Mag Silver (MVG) and Pan American Silver (PAAS) gained 17.3%, 11.5% and 12.4%, respectively, year to date.

Meanwhile, Silver Standard Resources declined 14.3% year to date. Coeur d'Alene Mines (CDE), Hecla Mining (HL) and Endeavour Silver (EXK), declined by 13.1%, 10.0% and 3.3%, respectively, year to date.

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,030.21 +6.04 0.03%
S&P 500 2,081.88 -0.29 -0.01%
NASDAQ 4,773.4720 +8.0480 0.17%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs