Single Best Trade: Stock-fund manager unveils top pick

If you’re looking to buy a stock, it never hurts to get some guidance from a trained professional.

Jeff Muhlenkamp fits that bill.

The former Army lieutenant colonel is manager of Muhlenkamp Fund. It’s a large-cap value mutual fund with $239 million of assets.

Its biggest holdings are truck retailer Rush Enterprises  (RUSHA) , pharmacy-benefits manager McKesson  (MCK) , semiconductor provider Broadcom  (AVGO) , oil-services titan Schlumberger  (SLB) , and natural gas producer EQT  (EQT) .

Muhlenkamp Fund has returned an annualized 19.17% for the past 12 months, 10% for three years and 15.17% for five years. That’s compares to 27.16%, 9.49% and 15.5% for the S&P 500 during those periods.

Muhlenkamp recently shared his single best trade idea with TheStreet.com.

So what is that single best idea?

Newmont  (NEM) , the world’s largest gold miner, which also produces copper, silver, zinc and lead. It has a market capitalization of $48 billion and a forward dividend yield of 2.4%.

Why do you like Newmont?

On the macro side, gold prices are likely to continue rising. And NEM is highly leveraged to the price of gold, with 90% of its revenue coming from gold mining.

Gold purchases by foreign central banks have become a major source of support for the precious metal. They’re buying gold instead of Treasurys for reserves. And central banks tend to be price-insensitive gold buyers.

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Gold will also benefit if highly indebted countries choose to devalue their currencies in order to manage the cost of their debt.

Newmont assumes a gold price of $1,900 an ounce in its planning. But the current price is $2,370.

In terms of company-specific factors, its profit margins should improve this year, as Newmont integrates gold miner Newcrest Mining and reduces its own debt.

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Newmont bought Newcrest last year for 26.2 billion Australian dollars (US$16.8 billion). The acquirer expects to realize US$500 million in synergies by 2025. It already has realized $105 million through the first quarter.

Newmont seeks to slash its net debt by US$1 billion through selling noncore assets and from free cash flow.

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The company is returning capital to shareholders via a US$1 per share annual dividend and a $1 billion share repurchase program.

Consensus analyst estimates are for NEM to generate US$1.8 billion in free cash flow in 2024 and $2.6 billion in 2025. If reality comes close to those forecasts, the repurchase program could be executed in a year or less.

What could go wrong?

• The price of gold could decline.
• The synergies forecast for the Newcrest merger may not be realized.
• Newmont’s input costs may rise faster than gold prices, squeezing margins instead of expanding them.
• Local governments may increase mining costs or shut down mines.