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An Unusual Kind of Commodity Stock That Can Return 1,000%

By Matt Badiali, editor, S&A Resource Report
Monday, October 18, 2010

How can you safely make 1,000% gains in the commodity market?
 
Through hoarding.
 
My first professional interaction with Dr. Steve Sjuggerud resulted in a 995% gain in a tiny gold company called Seabridge Gold. It's the largest winning trade in Stansberry Research's history.
 
 
Back then (in 2005), I was doing my graduate work in geology. Steve called to ask my opinion about the geology involved in Seabridge's projects. Seabridge wasn't operating as a gold mine... and it wasn't running an exploration program. This company's managers were bullish on gold, so they were buying gold deposits that weren't worth much at $400 gold... but would be incredibly valuable if gold shot to $900 or $1,200.
 
They were "hoarding" cheap gold.
 
Remember... back then, the gold price was around $400 per ounce. As gold took off (as the managers expected), the value of Seabridge's properties soared... and Steve's readers booked a ten-bagger. It's an incredible story on the value of hoarding cheap assets when nobody wants them.
 
I'm interested in this story because right now, a commodity's sitting where gold was years ago: cheap and hated, with lots of upside.
 
The commodity is natural gas.
 
As I've highlighted in DailyWealth before, the price of natural gas has been crushed in the past few years. New drilling techniques have brought on enormous new supplies of natural gas... and have sent prices from $12 to less than $4.
 
The price of natural gas is so low, it's not economic to drill for it... and natural gas properties are going for peanuts. There's zero investor interest in the stuff. Everybody thinks natural gas is dead, which is when good contrarians buy with both hands. Here's why...
 
As you read in Friday's essay, China is ravenous for fuels that can fire electrical power plants... which could send coal prices much higher. If China will pay more for coal, our miners will ship it to China. The Energy Information Administration expects coal exports from the U.S. to rise 58% this year.
 
It's neither hard nor all that expensive to convert a coal power plant to a gas power plant. If that happens, natural gas prices will rebound. You can see where I'm going with this...
 
It's time to hoard natural gas. It's time to hoard "PUDs."
 
PUD stands for Proven Undeveloped Reserves. These are deposits of natural gas we know for sure are in the ground. They're just waiting to be drilled. In a lot of cases, the stock market is offering vast amounts of cheap PUDs.
 
Take Rex Energy (REXX), for example. Rex is a small-cap oil and gas producer that trades for 14 times current gross profit. That's about right for oil and gas companies, which means it's trading just on its current production.
 
However, Rex also owns a huge swath of the Marcellus shale. The Marcellus is the lowest-cost natural gas field in the U.S. About 70% of Rex's proven reserves remain in the ground, undrilled. The market isn't taking that into account. That means we get all those PUDs... about 40 billion cubic feet of natural gas reserves... for free.
 
Should gas rise from $4 to $6 or $8 in the coming years, these assets will skyrocket in value.
 
Rex is no exception. There are plenty around, in the "left for dead" section of the stock market – exactly where we should be looking for new investments.
 
If you are patient, like the management and shareholders of Seabridge, you can turn a natural gas investment today into a huge capital gain down the road.
 
Good investing,
 
Matt Badiali




Further Reading:

If you want to learn more about Seabridge's amazing story, read Steve Sjuggerud's June 2, 2006 essay. "Seabridge had a mountain of gold underground, but it wouldn't have been particularly profitable to get it out," Steve wrote. "So it was a speculative gamble on the price of gold... One that paid off." Read more here: Seabridge Gold: One Great Stock Idea.
 
We've mentioned before how cheap natural gas is. "It's cheap relative to other energy sources, and it's cheap relative to gold," Matt wrote. "It's cheap relative to anything, really." But as many other commodities are starting to boom, you'll need to act fast if you want to get in on natural gas while it's still cheap. Learn more here: Where to Find Safe Resource Income Right Now.

Market Notes


NEW HIGHS OF NOTE LAST WEEK

China Petroleum & Chemical (SNP)… China oil
Sinopec Shanghai Petrochemical (SHI)… China oil
China National Offshore Oil Corporation (CEO)… China oil
China Southern Air (ZNH)… China's largest airline
Home Inns and Hotels (HMIN)… Chinese hotels
Yanzhou Coal Mining (YZC)… Chinese coal
Apple (AAPL)… taking over the world
Cummins (CMI)… high horsepower indicator
Polo Ralph Lauren (RL)… fine clothing
BHP Billiton (BHP)… diversified mining
ConocoPhillips (COP)… Big Oil
Peabody Energy (BTU)… coal
International Coal Group (ICO)… coal
Ecopetrol (EC)… Columbian oil
Gran Tierra Energy (GTE)… Columbian oil
Coca Cola (KO)… soda
Altria (MO)… smokes
AmBev (ABV)… emerging market beer
Patterson-UTI (PTEN)…. oil drilling
Odyssey Marine (OMEX)… treasure hunters
Lindsay Corp (LNN)… "ag" play… irrigation
Gold, Silver, Copper, Corn, Soybeans, Cotton

NEW LOWS OF NOTE LAST WEEK
 
Bank of America (BAC)… American bank
H&R Block (HRB)… tax preparation
Apollo Group (APOL)… secondary education
Strayer Education (STRA)… secondary education
Career Education (CECO)… secondary education

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