How to Use a Top-Down Investing Approach Ahead of a Recession

Knowing how to use a top-down investing approach, especially ahead of a recession, will lead you to finding top gold companies, such as Equinox Gold Corp (TSXV:EQX).

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One of the most popular styles of finding new potential investments is the so-called top-down approach. The gist of top-down investing is to look at the big picture, basically the macroeconomics of an economy, and based on what you see, shape your decision in that direction.

For example, a top-down investor looking at making a Canadian investment would start by looking at the whole Canadian economy.

Depending on their opinion of things and how they weigh certain factors in their minds, they may see the likelihood of a recession increasing, which would then drive them to look for recession-proof industries.

It’s clear that after you have made one or more conclusions about the economy, it’s time to become more specific and decide what industries to invest in and how much of your portfolio to allocate to each industry.

In our example from before, the investor may want to seek out a consumer defensive stock if they think their portfolio needs some stability, or maybe a gold miner if they think gold will outperform.

Deciding which industry to look at is the next crucial step, and you can’t proceed until you have decided what it’s going to be. Once you have decided the industry you want to invest in, it’s time to analyze each stock.

This is where you pit companies against one another to see how well they perform but also how cheap the stock is trading for in the markets.

In the example above, you would want to make sure the gold miner has solid operations, operates in a politically stable jurisdiction, has a quality management team, strong financials, and, last but not least, make sure the stock isn’t overvalued.

One such company in the gold industry is Equinox Gold (TSXV:EQX).

Equinox is an up and comer that just began production in 2018. As are all new gold miners, the stock was undervalued to reflect some of the risk that is present when miners are still exploring and developing the mines.

It’s in full production mode now, and the early numbers have been promising.

So far, of its three mines, two are producing gold and the third has been estimated to begin production the third quarter of 2020.

In the third quarter of 2019, however, its two operating mines produced more than 60,000 ounces of gold at an all-in sales cost of roughly $950. This is very promising considering its average realized price in the quarter for gold it sold was nearly $1,475.

It’s also promising that Equinox’s cost per ounce will most likely decrease, as the company ramps up production and grows its scale.

For the full year in 2019, it expects to produce between 200,000 and 235,000 ounces of gold. All of this production will be done for between $940 to $990 all-in sales costs. This isn’t that low, but it’s not high by any stretch of the imagination and is actually considerably strong for a new operator.

Equinox will continue to stick to its plan, which it thinks can bring it to more than one million ounces of production by 2023.

It’s a high-potential stock that has picked a great time to build out its operations. Building a gold company at the peak of market uncertainty and when gold prices have begun to rally for the first time in more than a decade couldn’t be a better time.

Equinox’s plans to try get listed on the TSX in the fourth quarter could also be a catalyst for share price appreciation, as it will be able to attract substantially more investments.

The bottom line is that a top-down approach looks at how the economy is performing, and which industries have the most opportunities before looking at any stocks.

Once you have decided the portion of your portfolio you will allocate to each industry, you can then begin to look for the top companies to invest in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa owns shares of Equinox Gold.

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