The old investment saying is, “buy low and sell high”.
If you do that with every investment you make, you won’t go far wrong.
But what if the investment you like, keeps getting cheaper? In fact, what if the price had nearly halved since the start of the year?
We’d say that makes it even more of a buy.
Because while the commodity price has dropped like a stone, the stocks that are searching for this falling commodity have gone up… some have more than doubled.
And as we’ll show you today, as long as there’s a demand for it, it almost doesn’t matter what the commodity price does…
For the past four years, natural gas has been one of the worst performing commodities. It fell 24.87% in 2008, -0.89% in 2009, -21.18% in 2010 and -32.15% in 2011.
This year, it is already down 39.8%. As this chart shows:
And it has halved since last November.
Only a brave investor would bet against it falling further. Even news this morning that Egypt is cutting off natural gas supplies to Israel is unlikely to give the natural gas price a boost.
But despite that, we’re still big buyers of natural gas stocks. We’ll explain why in a moment, but first…
At the Port Phillip Publishing, “After America” conference we got talking to a veteran of the oil and natural gas industry.
He’s been in the game for 30 years. What he didn’t know about the industry wasn’t worth knowing.
After your editor had just spent the previous 20 minutes talking up natural gas, this gas veteran was quick to bail us up in a corner to tell us we’d gotten it all wrong – the natural gas market was oversupplied, and the natural gas price was going lower.
We said we agreed.
But that wouldn’t stop us buying natural gas stocks.
And actually, this confirmation by an industry insider of what we already knew made it likely we’d buy even more natural gas stocks. Here’s why…
The area of the market we look at is small-caps.
These are some of the tiniest and – dare we say it – riskiest stocks on the market.
On any given day their stock prices can rise or fall by 10%, 20% or as we showed you last week, by 50% or 100%.
Why do you get this kind of volatile action? The answer is simple. These companies are involved in the early stage of resource development.
In many cases, they own nothing more than a permit from a government department granting them the right to drill for oil, gas, gold or copper on a specific patch of land.
And that’s it. They don’t actually own any natural gas… or oil… or gold. They just own a piece of paper.
The company’s task is to prove to the market as quickly as possible (before the money runs out) that they have an economically viable resource.
That takes time. And as we’ve mentioned, money.
Remember that many of these permit areas cover blocks of land that are hundreds of thousands of square kilometres. The company can’t afford to drill a hole in every square inch, so it has to do some initial testing and figure out where it stands the best chance of striking oil or natural gas.
That costs money.
Once it’s done that, it then has to decide how many drill holes it can afford and how deep it can afford to go.
If it decides to drill many holes to cover a wider area, it may mean it can’t afford to drill as deep. That could mean it misses striking oil or gas by just a few feet.
If it decides to drill fewer holes so it can drill deeper, it could mean it won’t drill that one extra hole where it could have struck gas.
So you see what we mean. This is high stakes gambling by oil and gas executives. One right or wrong decision could be the difference between a company going bust or a company making its shareholders a triple-digit percentage gain.
It’s for that reason why the falling natural gas price almost doesn’t matter. And why – to some extent – the oversupply of natural gas doesn’t matter either.
With the stakes so high and the rewards so great, natural gas companies and shareholders will always look to make a big buck where they can. And just because there’s a glut of gas, it doesn’t mean gas companies will stop looking for it.
As the recent performance of natural gas stocks shows, with so much at stake and the rewards so high, if a small-cap company achieves the improbable and strikes natural gas, there’s little doubt it will have a huge impact on the company’s share price.
So yes, we agree with the natural gas insider who tells us the gas glut will last for years. And we agree that it could keep natural gas prices down for the near future.
But that doesn’t mean you can’t make money from investing in natural gas stocks. What’s important isn’t so much the price of the commodity, but how confident you are that the companies you invest in have a good chance of proving they’ve found a viable asset.
Cheers.
Kris.
P.S. We’re continuing to back a handful of gas and oil plays in Australian Small-Cap Investigator. We believe that each one has a great chance to capitalise on the growth in the natural gas and oil market. If you’d like to take out a no-obligation trial, click here for details…
The Conference of the Year “After America” DVD