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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