Independent Stock Analysis covers an awful lot of ground and two months have passed since we overviewed the landscape. Perhaps an updated survey would be helpful. In addition to specific stock opportunities, let’s consider natural gas trumping oil, the precious metal complex strength, our coal position and just where is China at this time? First and foremost, JJ Butler is a practitioner in the markets.
ISA’s long held enthusiasm over the oil price continues to make new lows. Booming stateside supply and terminally declining OECD demand have reversed the ‘net export’ model. Meanwhile, WTI prices in the mid $80’s are marginally economic for producers. Energy stocks are plentiful but oil producing company’s are surprising rare. Should the facts change and ISA’s interest in oil bubble up, the go to oil name would be Northern Oil & Gas (NOG) which printed a new 52 week low this morning.
E&P’s always produce both oil and natural gas and the industry stampede from gas to oil has been remarkable. Gas in universally hated. We’ve watched as associated gas production and the backlog have kept a recovery at bay. Recently ISA has become more constructive on natty, pointing to the rig count and producer capex spending plans going forward. As for a catalyst, natural gas needs just a bit more time for declines be manifest and for winter to be at least modest.
Natural gas names are plentiful. The punch list: Low cost, dry natural gas producer at a good valuation. One company, old friend Ultra (UPL), stands out as the lone favorite. We’ll have more on UPL in the future as we wait for winter…
This summer ISA spent a great deal of time looking at the depressed and very small coal sector. The expectation was to find a strong company in a liquidity squeeze (short term debt vs long term assets) for a possible multi-bagger win. Unfortunately, the weak sisters trading at 1X potential cashflow are operational dogs. Instead ISA likes smallish Cloud Peak Energy (CLD) to be the sector leader. Income MLP’s Natural Resource Partners (NRP) and Alliance Resources (ARLP) are good income names. Remember, ISA remains wary in general of the income meme.
Franco-Nevada (FNV) is the best long term gold or royalty business bar none. The fine and conservative management has set the company for growth into next decade. Vital in my opinion is the exploration upside (culture and history) completely financed by others. Silver Wheaton (SLW) is my favorite for this particular leg of the bull run based on valuation (a tax issue depressing shares) and an expectation for silver to outperform gold. With their balance sheets, the lowest of costs, free cash flow, growth profiles, asset diversification and management attitudes these business’s are more safe than a diversified list.
ISA continues to monitor China with great interest. The optimum path for the Western investor to participate in the industrialization of emerging markets is to sell them what they need. Teck Resources (TCK) trumps in the industry. The small players are always short on scale and the super-majors have run up against the law of large numbers while being iron ore dependent.
China has disappointed economically for quite some time. China posts upbeat data amid leadership change at Marketwatch.
The SSEC shows the potential for an inverse head-and-shoulders pattern….If the next decline fails to make a lower low before it starts to rally again, the potential for a trend reversal is in place.”