A Beta Negative Natural Gas Dividend Payer
- The Dow Jones is Stretched
- Swimming against the tide
- Not Alpha, but almost as good
There are lots of things to talk about today, but I want to focus, laser-like, on one extremely small company in the commodity sector.
It’s a company that should benefit from higher energy prices as well as any corrections in the broad market.
On that subject: right now it’s vital to keep an eye on your short-term holdings. I’m not a trader by any means, but it doesn’t take a technical master to look at the 200-day simple moving average of the Dow Jones Industrial index, and see that the broad market is about as stretched as it’s been - ever.
And every time the stock market gets stretched this far, we’ve seen it snap back in spectacular fashion.
I don’t know if we’ll see another pullback to 7000 levels like we did in 2008-2009, but I think it’s wise to prepare for pullbacks.
You’re probably painfully familiar with the oft-repeated expression, “A rising tide lifts all boats.”
And while it’s true that a bull market in the broad indexes is generally good for all stocks - there are actually some companies that move INVERSELY to the broad market.
I’ve found one such a company, and it happens to be in a commodity space that’s been beaten down for close to two years now: natural gas.
You can see that natural gas prices are still depressed from their “normal” 2007-2008 levels. And while there are certainly no guarantees, it’s good to know that prices can’t get much lower than they are today.
But back to the company in question - it’s a small American natural gas trust. This company passes on the lion’s share of its profits to shareholders in the form of dividends. Currently, the company pays a 4.5% dividend.
But I’m not interested in the dividend for the purposes of today’s article.
I’m more interested in this company’s negative beta.
Beta is a number that refers to how closely a company’s stock price acts relative to the broad market. In other words, it’s a measure of stock price volatility as compared to the market.
A stock with a beta of two, for instance, is twice as volatile to the upside as the broad market. A company with a beta of 0.5 is half as volatile to the upside as the broad market. A beta of 1 implies the stock has the same volatility as the broad market.
But then there’s negative beta.
A company with a negative beta actually moves inverse to the broad market. When the market goes up, negative beta companies move down.
Of course, like price-to-earnings, price-to-book or any other metric beta is necessarily backwards looking. It tells us how a company has performed in the past. So, there are no guarantees that it will continue to behave that way - but it’s still a useful tool.
So finding companies with a negative beta gives you a list of investments to keep an eye on to buy when/if the broad market turns south.
That’s exactly why I’m interested in a company called Eastern American Natural Gas Trust (NYSE: NGT).
It’s extremely small with a market cap of just $138 million.
But it’s in a sector that’s been beaten down, and it’s shown a tendency to trade inverse to the broad market. The dividend makes it slightly defensive and less volatile than other small caps.
For those reasons, it’s definitely a stock to keep on your radar as the broad market continues to stretch past its 200 day moving average.
Good investing,
Kevin McElroy
Editor
Resource Prospector
no positions
