Oil Boosting Valuations, But This Commodity May Be the Best Buy Right Now

by Profit Confidential
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Submitted by Profit Confidential as part of our contributors program.

The way things are going, the place to be in capital markets seems to be in energy. Oil and gas stocks, particularly smaller ones, continue to be solid earners in a stock market looking for direction.

While oil prices gyrate on geopolitical events, market speculators have been bidding the commodity based on the slightly positive tone in U.S. economic data. It doesn’t take a lot for market participants to bid oil. The only way to beat it as a consumer is to own a piece of the company.

While many junior oil and gas producers are moving higher in value on the stock market, valuations are particularly lofty. They were high to begin with, before recent events in Syria, but they have only gotten worse. Now isn’t particularly a good time to be considering new positions on the stock market, but the energy sector is a bright light in an otherwise lackluster environment.

Jim Rogers, the “Investment Biker,” wrote that he would continually analyze all capital markets, but trade very little. He would wait until an investment opportunity became so compelling, and then take on a considerable position (with leverage).

I don’t see this kind of opportunity with oil, but I do see it in natural gas as a longer-term, cyclical play after the natural gas build-out is completed.

One of the most successful natural gas producers on the stock market has been Cabot Oil & Gas Corporation (COG). Even with flat natural gas prices, this oil and gas producer is up four-fold since the beginning of 2010. Its valuation is super lofty, but then again, this enterprise is delivering on its promises. Second-quarter 2013 production grew 52% to 95.2 billion cubic feet. Earnings grew 148% to $89.1 million. The number was actually higher save for a few one-time items.

There’s a lot to be said, in my view, for a company like Chart Industries, Inc. (GTLS), which offers a way to play the natural gas build-out. The company works with oil and natural gas producers to create storage solutions for hydrocarbons. This enterprise is growing, its management team is diligent in the way the company expands, and the stock is also selling to China, where there is a voracious appetite for energy storage solutions.

Chart Industries is a mature business, but it generated second-quarter revenues of $298.3 million for a solid gain of 24%.

The company’s order backlog is at a record $664 million. Second-quarter earnings were $20.0 million compared to $17.9 million.

Chart Industries is selling product to PetroChina Company Limited (PTR). The company just announced another $50.0-million order on top of a $45.0-million order for self-contained liquefied natural gas station modules.

The company’s second-quarter earnings result beat consensus, and while 2013 revenue expectations are still the same, Chart Industries boosted its bottom-line forecast for the year. (See “How to Play the Bakken Oil Boom While Oil & Gas Companies Are at Their Highs.”)

In terms of a multiyear investment theme, I’d seriously consider some sort of exposure to natural gas. But it doesn’t have to be a pure play producer like Cabot Oil & Gas. A company like Chart Industries would be a worthy addition for long-term portfolios on a major price retrenchment.

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