Is It Time To Book Profits In Royal Gold?

Royal Gold (NASDAQ: RGLD) looks perfect at the moment – high-margin, debt-free, and riding the tailwinds of an exceptional gold rally. The revenue has surged nearly 19% in the past 12 months, handily outpacing its three-year average growth rate of 9.6%. Add in a 60% operating margin resulting from royalty-model, insulation from operational risk, and high cash flows – on paper it looks perfect. When everything looks perfect, it’s usually the perfect time to start asking the hard questions. And here’s the biggest one: Is it time to book profits in Royal Gold? We think so!

The stock has returned nearly 40% this year, and we’ll be honest, there might be more room to run. But it is certainly not the right entry point as the stock looks overextended. We screen for such over-extensions in our High-Quality portfolio, which has outperformed the S&P 500 and achieved returns greater than 91% since inception.

Image by Steve Bidmead from Pixabay

Here’s what has us concerned:

Riding the Gold Rally – Until It Stops

The stock’s impressive recent performance tracks the surge in gold prices, which are now at all-time highs. But gold is sensitive to macro catalysts. The Fed has signaled interest rate cuts in 2025, and we believe this expectation is likely priced in already. If that plan doesn’t materialize as expected, gold could fall. Furthermore, if geopolitical tensions ease and fair trade agreements are reached, it could again lead to investors booking profits in gold and investing in more risky assets.

So when the tide goes out, the first ones to feel it could be royalty stocks like RGLD that are essentially levered bets on gold price performance. Royal Gold isn’t over-delivering, it’s riding a wave. And waves crash.

This Isn’t the Kind of Price Action You Want

Here’s something odd: Royal Gold hasn’t exactly flown in a straight line. Despite gold’s steady climb since mid-2023, RGLD hasn’t kept pace with the same consistency. In fact, it is prone to large pullbacks whenever it shows strong momentum – think 15%-30%. And that’s a red flag in disguise.

PE Has Shrunk, and That Tells You Something

This one’s subtle, but it matters.

RGLD’s P/E ratio has dropped from 38 to 33 in the past six months indicating that the price upside is primarily due to expansion in earnings. If the market truly believed RGLD had a breakout future ahead, you’d see the P/E expanding to some extent, not shrinking, or at least staying put. What does this mean in plain English? The market is saying: “You’ve had your moment. Don’t expect more.”

If you’ve been holding Royal Gold through this rally – you caught the wave and made money. But here’s the smart move: don’t get greedy. Sell your position, or at least trim it and rebalance. Money rotates to pockets of value. Such periodic or trigger-based rebalance is core to the High Quality (HQ) Portfolio which, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.