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The rare earth elements sector is a good place to find value according to this advisory's interview with Encompass co-managers Marshall Berol and Malcolm Gissen.
Mr. Gissen explains that new applications for REE continue to be found and these compounds feature prominently in green technologies. Hybrid cars use more than 20 pounds of REEs, and they're also used in windmill and solar installations. Rechargeable batteries and LED lighting as well as many consumer electronics also require REE compounds.
Until recently, approximately 95 per cent of the world's REEs came from China. The price of these elements has increased because the Chinese announced export reductions and cracked down on a number of illegal mines.
"We realized several years ago that demand for REEs would increase significantly and invested in Avalon Rare Metals (TSX-AVL), a Canadian company that has a world-class resource in the Northwest Territories at Thor Lake." The company has a solid financial position, low debt and is attractively priced.
Another company leveraged to growing demand for REEs is Dacha Capital (TSX-DAC). Dacha formed earlier this year and has purchased rare earth elements in China. The company exports them under license and stores them outside of China in anticipation that prices will rise over the coming years. "The company should profit from its inventory of these metals. The stock offers a way to play rare earth elements without being directly involved in their mining."
Meanwhile, Mr. Berol says his best piece of advice for investors for the next year is to hang in there. "Don't give up on equities." Beware of following the crowd into fixed income funds. That strategy will not pay off since interest rates are bound to rise. Interest rates are at all-time low-levels, but they won't stay low forever. When rates eventually go up, bond prices will tank and fixed income bond returns "may be extremely disappointing."
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