Betting Big on Natural Gas

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
It was a mixed week in global stock markets last week, after Friday’s sharp pull back in the markets. The Dow Jones was up 0.11%, and the S&P 500 ended the week 0.32% higher. The MCSI Emerging Markets Index rose 0.56%.
 
Your Bull Market Alert portfolio, however, had a very strong week. National Bank of Greece (NBG) soared 13.43%. Seadrill Limited (SDRL) jumped 4.75% and moved back to a BUY.  Novo Nordisk (NVO) soared 4.48%. Michael Kors Holdings Ltd. (KORS) jumped 3.91%, and fertilizer play CVR Partners LP (UAN) continued its recovery, rising 3.05%.
 
Long time Bull Market Alert subscribers will know that I am willing recommend any asset class that I believe will make you a profit, whether that is a stock, bonds, currency or commodity. This week’s Bull Market Alert recommendation — the United States Natural Gas Fund LP (UNG) — is just such an example. UNG tracks the daily movements of the spot price of natural gas as measured by the daily change in the price of the Futures Contract on natural gas traded on the New York Mercantile Exchange (NYMEX).
 
Natural gas has been the “big short” in the commodities world ever since the start of the “Great Recession.” It even dropped around 45% in the first few months of 2012.
 
But since bottoming in April, natural gas has been in a big uptrend, moving from below $2 per British thermal units (Btus) this past spring to around $3.80 per Btu. And investment bank Morgan Stanley expects natural gas prices $5 per Btu could hit by Q1 2013. 
 
Here’s why I agree…
 
On the supply side, there has been a big decline in the count of natural gas rigs, from 936 a year ago to 422. That’s the lowest number of rigs since June 1999.  Why the drop? Low prices and a supply surplus forced many major companies to switch to oil exploration as opposed to natural gas. Now lower production has led to soaring natural gas prices.  No wonder there has always been a huge correlation between collapsing oil rig counts and natural gas prices.  
 
Natural gas stockpiles for the winter are already coming in lower than expected. The U.S. Energy Information Administration (EIA) recently announced that domestic gas inventories increased rose last week by 72 billion cubic feet to 3.725 trillion cubic feet- well below market expectations.
 
Meanwhile, demand for natural gas in the summer was much higher than expected as record-breaking heat caused demand to surge for air conditioning. Nor is winter offering much of a respite. The U.S. government expects temperatures to be 20% colder than last year. With about half of U.S. households utilizing natural gas as their heating source, the EIA estimates that household natural gas consumption is set to increase 4.7%, even spending will average 15% more thanks to soaring prices.
 
Among all the ways to profit from the rise in the price of natural gas United States Natural Gas Fund, LP (UNG) is the best — though far from perfect. UNG can lose some value as it rolls over into the next futures contract if that next contract is higher-priced, a condition known as “contango.” That accounts for UNG’s underperformance versus the commodity it tracks.  Nevertheless, based on current prices, if natural gas hits $5 per Btu, there is still roughly 25% upside for UNG between now and the end of the year.
 
So buy United States Natural Gas Fund, LP (UNG) at market today, and place your stop at $17.50. For potentially even bigger upside, I recommend the January 2013 $23 call options (UNG130119C00023000).
 
Portfolio Update
 
Bank of Ireland (IRE) added 1.08% last week. IRE remains lodged between its 50-day and 200-day moving averages to repeat its month-long rolling pattern once again. IRE has been making good strides towards recovery over recent months — even launching a two billion euro mortgage fund, which supports the fledgling housing recovery by funding first-time homebuyers. IRE is a BUY.
 
National Bank of Greece SA (NBG) had another fabulous week, jumping 13.43%. This makes NBG’s gain for the previous month more than 30%. And, this comes just as the European Commission, the European Central Bank, and the International Monetary Fund expect an agreement on new funding in the next several days. NBG hit a new 52-week high last week and is a BUY.
 
Novo Nordisk A/S (NVO) made up for last week, and then some, rising 4.48%. I previously highlighted the NVO’s long-acting insulin product Tresiba getting approval for use in Japan. The good news just keeps coming. An advisory panel recommended approval for Tresiba, as well as NVO’s other insulin product Ryzodeg, for use in the European Union last Thursday with a final decision expected in the next few months. These open new doors to huge global markets, and represent a major new avenue of profitability for Novo. NVO is scheduled to report earnings on Oct. 31. NVO also hit a new 52-week high last week and is a BUY.

Seadrill Limited (SDRL) took a strong turn upwards last week to gain 4.75% and change to a “Buy”. Much of the positivity came on high expectations for the initial public offering (IPO) of SDRL’s new Seadrill Partners LLC (SDLP) operations company. SDLP opened for trading last Friday and jumped 11% — on a day that saw the Dow Jones plunge over 200 points. SDRL is a BUY.
 
Michael Kors Holdings Ltd. (KORS) added 3.91%. Buckingham Research initiated coverage on KORS last Thursday, rating the stock a “Buy”. KORS has managed to maintain the $52.00 level since August while several analyst firms have either initiated coverage of the stock, and/or raised earnings and price targets. The rising 50-day moving average, which recently broke through the $52.00 level, is a reassuring development as well. KORS is scheduled to report earnings Nov. 13 and is a BUY.
 
CVR Partners LP (UAN) gained 3.05% over the past five trading days. This makes the third week in a row that UAN has posted strong gains. UAN will report earnings on Nov. 5. UAN is a BUY.
 
Medivation Inc. (MDVN) started a recovery last week, ending the week 1.32% lower.  Ratings firm Jefferies & Company added positive news last week by maintaining their “Buy” rating for MDVN and setting their price target to $61.00 — 15% above Friday’s close. MDVN is scheduled to report earnings on Nov 8 and remains a BUY.
 
Stratasys, Inc. (SSYS) dipped 1.08%, but managed to spend most of the week above its 50-day moving average. Stratasys moved last week to extend the review period for its merger with Objet, Inc. by 45 more days. This will give the Committee on Foreign Investment in the United States (CFIUS) additional time to inspect terms of the merger. The merger has already cleared several hurdles, including shareholder approval from both Stratasys and Objet. Slipping below its 50-day moving average, SSYS is a HOLD.
 
 

 

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