The most hated and beat-up sector in the markets is the natural gas sector. I have written on both these companies and believed what I shared with you all. Today, I am very convicted on both names at current prices and am also looking at Ranger Resources (RRC).
The last two weeks have seen a shakeout for the ages. Chesapeake Energy (NYSE:CHK) saw their stock price drop from $4.18 on Jan. 25th to $2.51, a gut wrenching 40% drop on no news. That makes my call to buy Chesapeake one of the worst calls of the year. I came out and said I was early (wrong) and warned investors to get off margin. I sold my shares at $4 and re-bought from $2.92 to 2.52 level in the capitulation sale last week.
Southwestern Energy (NYSE:SWN) saw their stock drop from $5.59 on Jan. 24th to $3.41 on Feb. 9th. A 39% drop? Really? Last week in the heat of the market meltdown the company came out with pre-earnings news stating they were on track with their goals and making $1.3B in free cash flow?
The market sold off anyway testing the nerves of anyone involved in the stock. There is nothing easy about investing, trading or gambling in this space. Call it whatever you want; it’s been a very tough last three weeks.
Southwestern should be trading at $6 or higher right now. Yes, that’s right, but the market says “no” for now. A P/E of 5 must be way to high for this company with $1B in cash because they are going BK? Give me a break. The good news is that the end is near.
Being a contrarian can be lonely
Buying stocks around their multi year low capitulation bottoms is a lonely proposition. Who would want to buy natural gas stocks now? Very few.
When so called experts are downgrading stocks amidst improving fundamentals and rising profits, I sit back and say, Hmm.
Vale (NYSE:VALE) was trading at $2.40 a couple years ago. I had 40K shares of the stock. The head of GS commodities came out on Bloomberg and said iron ore prices would remain under $40 for the next 5 years. Imagine the despair I along with other investors felt hearing this news.
Fast forward 90 days and iron ore was trading at $60. Vale jumped to $5 in a matter of a month or so. It now trades at $13. My point here is that the so-called experts are sometimes full of bologna!
Do not be swayed in your opinions when you know better. Now, I am not saying CHK or SWN is a VALE. They clearly are not. They are, however, recovering from the brink of total disaster and, in my view, on the road to serious recovery.
When I look around the markets for bargains, I do not see a myriad of choices. Buying at the bottom can yield multi-baggers in the markets. To survive, one must have a strong will and mindset to withstand the onslaught of negative news and boiler room tactics on message boards designed to get you to sell your shares in panic.
While we would all like to see our trades work out as soon as we click the button, it doesn’t always work out the way we want. To be successful, stick with it until you see some facts that go directly against your thesis. I see no change in the narrative except that things are getting materially better for both these dogs in the market.
Do not trade these two names on margin. Why? You just witnessed the why over the last three weeks. If you were one of those margined out, I am sorry for your loss. I tried to warn investors when the trade went the wrong way.
Look at Zion Oil and Gas (ZN) if you need hope (but hope is not a strategy):
The same type of moves can happen in both of these stocks at any time.
A look at Chesapeake’s earnings presentation
Source: Chesapeake Energy (go to the company’s website to download the presentation in full)
Look, these companies should not be a huge part of your portfolio, but I believe that they are among the few real companies that have the opportunity for 100% appreciation from these current levels in the energy space.
My game plan
Buy weakness from here in both these names. Premarket news about inflation is overblown once again. We need some inflation in wage growth. Deflation used to be the problem, now inflation is a problem? Give me a break, rates are low.
I firmly believe that oil is going back up in the next few weeks. Do not chase any names, wait for some market manipulations and buy panic. Continue to cut margin debt and be prepared to trade, taking profits and cutting losses before they become disasters.
Thoughts on GE
GE (NYSE:GE) just handled the 500 point swing to the downside premarket pretty good. It is possible that the bottom is 14.23 although I still think it could trade down to a $12.50 handle, that does not mean it will. Just be prepared and save some powder to buy at that level. I removed my hedge on 40% of my GE holdings yesterday. I would expect GE to have a rally day on a big down day. That is usually how it starts, watch for the swing trade.
At current levels, I love Chesapeake Energy and Southwestern Energy. I will be adding to both on weakness and new yearly and decade lows. Conviction trading is when you will not be swayed by the opinions of others. I will not be swayed by the market price of natural gas today or market analysis from Goldman Sachs slapping sells on multi-year capitulation.
The market is corrupt, this is factual. Why do I want to trade a corrupt market? Because I love the game! I see it for what it is, that is why I started writing articles. We are all connected in this global game of cat and mouse. Pick your spots wisely, do not try and be a hero and stay off margin. Enjoy the ride and Happy Valentines day!
As always, be sure to have and exit strategy before making any trade.
Disclosure: I am/we are long SWN, CHK, BP, BAC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.