News Analysis date published New: 
Monday, September 17, 2012 - 10:17

The Single Best Way to Make Money in Natural Resources

Where are the best opportunities right now in natural resources?

The obvious answer is the companies that are digging the stuff out of the ground.

But to find tomorrow's next big winners, you also have to look at what's hated.

For example, no other natural resource has been shunned during the past few years quite like natural gas. Prices have rebounded sharply since April, but that's nothing compared with where prices were before.

Shares of high-quality producers have barely responded -- but that type of disconnect is always resolved in time.

Most industry execs say natural gas will need to hit at least $5 per thousand cubic feet (Mcf) before they start revamping their budgets and directing more drilling rigs and resources back into gas fields such as the Haynesville Shale.

So we've got a long way to go before the industry turns up the production faucet.

But if gas reaches $5 per Mcf, then cash flows should explode for low-cost producers like Ultra Petroleum (NYSE: UPL). The company can turn a profit with gas as low as $2.88 per Mcf -- and it has 5 trillion cubic feet of reserves waiting to be sold.

You should be looking for gems like this in "hated" sectors. It's the best way I know to make huge gains in the stock market.

There are also plenty of other sub-sectors feeling a brisk tailwind from growing consumption of this clean, inexpensive fuel -- liquefied natural gas (LNG) shippers just to name one.

Companies that own LNG tankers aren't really vulnerable to underlying price fluctuations. If anything, they are benefiting from today's low price environment. The cheap price of natural gas has stoked demand from power generators and petrochemical makers, boosting the global LNG trade.

Midstream infrastructure owners also provide exposure to the huge volumes of gas being transported without the inherent price volatility. Readers of my Scarcity & Real Wealth newsletter, for example, have already pocketed a 34% gain with Williams Companies (NYSE: WMB), which owns thousands of miles of pipeline and two dozen processing and treating facilities.

About 10.6 billion cubic feet of natural gas flows through the firm's hands each day, or 15% of the nation's total usage. That volume feeds the company a steady stream of contractual fee-based income -- which is promptly distributed to investors.

I can't give all my favorite natural gas picks away (out of fairness to my Scarcity & Real Wealth readers), but I can also say that I'm currently looking at the ground floor of the shale-gas energy revolution.

These future energy sources dot the country from the Gulf Coast to Canada. By itself, the Marcellus Shale stretches across parts of Pennsylvania, New York, Ohio and West Virginia and covers 95,000 square miles -- an area half the size of France.

That's a lot of ground to cover. Look at the map below, and you'll understand why industry experts believe the United States will need to install another 35,600 miles of long-haul gas transmission pipeline and 414,000 miles of local gathering lines to meet increased production over the next 25 years.

That's enough pipeline to stretch around the earth 18 times.

Savvy investors shouldn't just ask who will operate these thousands of miles of energy conduits -- but who will be asked to build it.

I've got my eye on MasTec (NYSE: MTZ), a specialty contractor that has won the business of industry heavyweights.

MasTec's pipeline construction revenue skyrocketed from $43 million in 2007 to $774 million last year. That 18-fold increase represents a torrid compounded annual growth rate (CAGR) of 106%. In other words, sales have been doubling every year, on average.

And the company is just getting started.

I'm not necessarily saying you should buy MasTec, Williams or Ultra today. On the contrary, I'm saying you should buy these assets when they're hated -- when the normal volatility of natural resources causes prices to swing down.

Natural resources are pushed and pulled daily by the global economy. This is a perfect setup for smart investors who can buy these stocks when they're overlooked and underappreciated.

You don't see a McDonald's (NYSE: MCD) hamburger priced at $3.50 one week fall to $2.25 the next and then rebound to $4.75. The menu is fairly stable and predictable. Same thing with toothpaste or movie tickets or your monthly phone bill -- prices just don't bounce around much.

That's not the case with natural resources. We've all seen gold rise or fall $50 an ounce in a single trading session. And that's relatively mild compared to some others. All of this means that commodity prices frequently whipsaw back and forth -- hence the love/hate relationship with investors.

Action to Take --> My advice: Buy these stocks when they are hated. It's the only way to pick up these scarce assets at pennies on the dollar.

Don't fear volatility; it can be your strongest ally. If the end goal is to buy low and sell high, then these extreme price swings are just what the doctor ordered.

Yes, it's counterintuitive. We've all been hardwired to flee from potential danger, not run toward it. But trust me when I say that overcoming this mindset will put more big winners in your portfolio than just about anything else.

[P.S. -- If you've been looking to add resource stocks to your portfolio, now may be the time. The global trend for commodities is rising demand coupled with shrinking supplies. That's why we've seen soaring prices for years... and it means short-term sell-offs can be rare buying opportunities. To learn more about Nathan's Scarcity & Real Wealth newsletter which focuses solely on the market's best resource investments, visit this link (without watching any promotional video).]

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of WMB, UPL in one or more of its “real money” portfolios.

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