Palladium Producer Is Top Pick Among Miners

But in order to make money, you've got to make moves. From time to time, for any number of reasons, we are compelled to make trades. Hopefully, we take the risk in a fashion that allows the potential profit to outweigh the possible loss.

In today's market, that's led me back into a position in Stillwater Mining (SWC), the only U.S. producer of palladium and the largest primary producer of the metal outside of South Africa and Russia. Palladium is a precious and industrial metal with a vast number of uses including auto catalysts, dentistry, electronics and jewelry. By many measures, palladium is even more rare than gold. Global mines produced 81 million ounces of gold in 2006, but only seven million of palladium.

The market is considerably smaller than other precious metals, as evidenced by open interest in the futures market. There are roughly 15,000 Nymex palladium futures outstanding, a pittance compared to the 500,000 open interest in gold. This is a tiny nook in the capital markets — just the type that can heat up quickly when fresh money comes pouring in.

Regular readers will undoubtedly recognize the name. I've mentioned and traded this stock before, sometimes with a gain and other times at a loss. Of course, that's all past history. Every minute in the market we make decisions about the portfolio we want to have. Right here, right now, I happen to think the stock is a buy.

I'm buoyed by the fact that, at least for the moment, my bullish interest in mining stocks appears to be rooted in objective reality. From Barrick Gold (ABX) to BHP Billiton (BHP), I can point to a half dozen or more mining stocks that have done well as of late. Recent performance for the PGM (platinum group metals) niche is also impressive. Over the past month, shares of Stillwater and North American Palladium (PAL), the smaller publicly traded palladium miner, are both up double digits. Yet neither the volume on the message boards nor in the stock itself would lead me to believe Stillwater is a top choice for the fast-money herd — at least not yet.

Moreover, the macroeconomic environment seems to be favoring the trend. The weak dollar, which I've written about extensively over the past year, is benefiting most commodity-related concerns. Gold is at a 28-year-high, crude oil is at an all-time high and others, like wheat, have jumped sharply in recent weeks. The commodities theme is very timely indeed.

Even though I'm bullish on the idea, what gives me the assurance I need to sleep at night is the knowledge I'm trading in accordance with sound technique. Stillwater is a position, but it's far from my only position. I've allocated less than 5% of my total assets to the trade and have set a rigorous stop-loss limit to mitigate the downside potential. I'm making a bet, not betting the farm.

I'm also prepared to wait on it for a few quarters should the stock simply mark time. Because it's not my only exposure, the trade doesn't need to be the Hail Mary, do-or-die type of bet that far too many investors, especially precious metals investors, tend to engage in.

When it comes to trading, it's important not only to monitor the market but yourself as well. So after analyzing the market and the trade, I take a look at my own attitude. Even with your top ideas, you should feel a sense of nervousness and fear, the proverbial "wall of worry" that's present in the midst of a bull run. Personally, I'm confident but not cocky about Stillwater. It's a risk, for sure, but I believe a downright timely one. And by using proper technique, I'm taking it in a thoughtful and prudent way. From this point on, the market calls the shots.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig's fund held positions in many of the securities mentioned.