I like commodities because they tend to be extremely seasonal and predictable.
Natural gas, for instance, is extremely seasonal. According to historical commodity data, natural gas tends to go up in August. In nearly 80% of all the past years that natural gas has been trading, if you would have purchased this commodity on August 1st and held it till the end of the month you would have a made a profit. Now that is what I call a high probability trade.
Natural gas prices are almost entirely driven by the weather. And if you live in the Midwest, Northeast or West Coast, you know that we are having record heat waves this summer. That means a lot of people are running their air conditioner. And what powers most utilities now? Natural gas.
So after yesterday’s extreme move in natural gas, which broke a huge downward trend line, I think we could see prices jump by as much as 20% by the end of August.
If natural gas pulls back at least two days in a row in the next week (pullback means two consecutive down or flat days in price) I will be a buyer of everything natural gas related.
I like the natural gas ETF (NYSEARCA:UNG), as well as call options on it. Another alternative, the 2x leveraged ProShares Ultra Natural Gas ETF (NYSEARCA:BOIL).
A Small cap natural gas stock that I like is Penn Virginia (NYSE:PVA), this stock is deeply undervalued it is trading at 1/3 of its book value, and is currently breaking out of an inverse head and shoulders pattern. This could take the stock to $7 in a very short time frame. This would be mean an almost a 40% move for Penn Virginia. The September $5 Calls are attractive at $.40 cents or less, which means if Penn Virginia goes to $7, we are talking about a home run triple digit plus winner on those call options.
My favorite small cap natural gas stock is one that not only will benefit from rising natural gas prices, but also has the kicker of having three top billionaire activist hedge funds involved, who own more than 20% of this stock. We own a huge chunk of this stock in my Billionaire’s Portfolio, and I believe this stock could go up 150% or more by the end of the year.
William Meade is the President of Pure Alpha Research, a hedge fund consulting and investment research firm. He is the former Director of Research at Zacks Investment Research in Chicago. Before that, he was the lead analyst at a top performing $1.2 Billion dollar institutional investment firm and hedge fund. Mr. Meade has a Masters in Applied Economics from The Johns Hopkins University. Learn more about William Meade and how he follows Billionaire Investors into stocks by visiting the Billionaires Portfolio.