My favorite energy indicator is saying “buy” right now
- The indicator is flashing right now
- How to compare apples to apples
- The investment to buy today
Seven months ago, this indicator flashed telling me that it was time to buy one specific energy commodity above all others. I recommended buying one simple investment to take advantage of the impending uptrend.
If you bought that investment then, you'd currently be sitting on a 25% gain and you would have collected an additional 4.2% in dividends.
The good news is that this indicator is flashing AGAIN, and I believe that if you buy this investment now, you'll be in a good position to capture similar gains over the next 6-9 months.
What am I talking about?
Well, on April 5, 2010 I wrote to you saying it was time to buy natural gas. Natural gas had just bounced off of year-to-date lows just under $4 per thousand-cubic-feet (MCF).
But more importantly, natural gas was selling near all-time record lows when compared to the price of oil. I like to compare resource to resource - because I'm not a currency expert. I don't really think anyone is - I mean, how could anyone accurately tell you what a Federal Reserve note is worth?
It's nearly impossible to guess what one dollar will be worth a week from now, let alone a month or a year. So it's much more useful and helpful to look at an apples-to-apples comparison.
So I compare natural gas prices to oil prices.
That's the indicator I've been referring to. I simply take the cost of one barrel of oil, and divide it by the cost of one MCF of natural gas.
Last April, the ratio was making new all-time highs, and today, it's again scratching into new territory.
I believe that this ratio will again drop back to more 'normal' levels below a ratio of 20 - and when it does, my favorite natural gas dividend payer should rise.
The other reason I'm excited about natural gas prices is that inventories this time of year are typically near all-time highs. This year is no different.
I've plotted the five year inventories to show the very predictable nature of natural gas in this country:
You can see how the September-November range is when inventories are building and reaching their peak. It's not surprising to see annual lows for natural gas prices this time of year for that reason. Lots of excess inventory (supply) easily satisfies demand, so prices remain low.
But as the weather gets colder, we'll burn natural gas to heat our homes, inventory will fall, and prices should rise.
It's possible that natural gas prices could fall - but it's not likely. And as they rise over the next few months, there's one company that should benefit.
I'm talking about Hugoton Royalty Trust (NYSE: HGT). If you've been a reader for very long, you probably remember me bragging about the gains you could be enjoying if you had bought this stock back in April when I first recommended it.
The good news is that I think this company is again a compelling buy. The bad news is that it likely won't stay that way for long.
This company owns royalty stakes in several natural gas properties in the United States. It's pretty simple: it gets paid a cut of the profits from the natural gas that these producers bring to market. That's it! It has no other assets besides the cash it gets from these producers. And it has zero debt!
And the best part: Hugoton currently pays a 7.9% dividend.
The business couldn't be simpler.
Like I said, this stock isn't likely to be a good buy for very long.
I'd recommend picking up shares UNDER $21. That price has been a resistance point for months now, so don't chase.
Good investing,
Kevin McElroy
Editor
Resource Prospector
full disclosure: As of this publication date, I own no shares of
Hugoton
