Trading a Promising Energy Stock Using Smart Speculation
The perfect speculation.
Is there such a thing?
But the latest pick in The War Room, a stock pick I might add, may come as close as you can get.
The name of this company must remain private since War Room members are currently in the play. So I’ll refer to this company as “stock X.”
Let me set it up for you…
A speculation is when you risk a little bit in hopes of making a lot. You look for a situation that has a ton of things going for it…
If those things come to pass, even if it’s one or two things, the payback could be worth significantly more than what you paid. All the while, and this is important, you risked so little that the position is hardly worth paying attention to.
Let me set up why stock X makes such a perfect speculation.
It’s in the energy sector. This has been the worst-performing sector in the S&P over the past decade. Stock X is a large producer of both natural gas and oil, with properties in all the right places. Over the past decade, until new management took over, stock X made a series of expensive missteps.
First, it relied mainly on natural gas and bought up a lot of natural gas properties when gas prices were much higher. Of course, you’d think that move would have been the right one since natural gas is becoming the choice for power plants and the world is looking to reduce carbon output.
But what the company didn’t count on were the huge amounts of natural gas that would be produced as a byproduct and direct product of the shale revolution, which freed up trillions of cubic feet of natural gas.
So the company decided to become diversified and changed the mix of its products from all gas to a mixture of oil and gas. That was probably the best move stock X made in terms of buying time to right the ship.
The problem was the company took on a lot of debt to buy up the natural gas fields in its heyday.
Another problem was the price of natural gas and oil in the current market. Both are down, which cuts into profit margins.
If those problems don’t seem like enough to worry about, then the recent news about the novel coronavirus might, as it could reduce global growth and energy demand.
Things looks bleak for stock X, right?
Remember, this stock is so cheap that owning a thousand shares would cost less than taking a family of four to a professional sporting event. Yet, 10 years ago, stock X’s share price would have equated to season tickets for your whole family. That’s how much it has declined.
Here are a few reasons the speculation makes sense…
- Insiders have been buying the shares heavily above the current price, with some investing millions of dollars.
- The U.S. economy is strong and constantly consuming energy.
- The Organization of the Petroleum Exporting Countries (OPEC) is holding production down to stimulate energy prices.
- The novel coronavirus situation offers a catalyst if it’s contained as quickly as past viruses.
- The company is cutting back its debt and now has less than half the debt it had at its peak.
- The company expects have positive cash flow this year, the first time in a long time.
- Stock X has hedged a lot of its production at much higher prices than the current market price.
Hedging at higher prices is a great thing, as it allows you to sell production at prices higher than the market price. Sentiment for the company and sector is at an all-time low, with share prices reflecting this.
These are just some of the reasons this stock made for a great speculation. It could all go wrong, but that is why you speculate with pennies and not dollars!
If you want to know the stock pick, why speculation can be the perfect strategy and what to look for when placing trades, join me in The War Room and get access to it today!
About Karim Rahemtulla
With more than 20 years of experience, Karim has mastered the subtle art of options trading. What we admire about him is his ability to score huge gains while minimizing the massive amount of risk that often comes with options. Beyond his expertise in options trading, he is also the author of the best-selling book Where in the World Should I Invest? He publishes weekly about smart speculation in his latest free e-letter, Trade of the Day.