The best investment call (with the benefit of hindsight) of 2012 has to be the one made by Jeff Gundlach back in April.
Gundlach suggested that if he was a 29 year old hedge fund manager with a garish pink shirt and thick gray stripes he would go long natural gas (UNG), short Apple (AAPL) and leverage the trade 100 times.
There is Contrarian investing and then there is Contrarian investing. And that my friends was a serious piece of contrarian investing.
The first part of the trade was shorting Apple, a company with these compelling short characteristics:
- A dominant brand name
- A fortress of a balance sheet
- A dividend
- A massive share repurchase program
- A reasonable Price to Earnings Ratio
- Consistent year after year growth
That looks more like a list of what NOT to look for in a short sale.
How has the short recommendation worked out? As we can see from the chart below, pretty darn well. From almost $650 when Gundlach suggested the trade Apple has decreased to around $500 today.
The other side of Gundlach's trade was to go long natural gas which at the time was trading around $2 per mmbtu.
The common wisdom about natural gas at the time was:
- There is a massive glut of the commodity
- By the fall of 2012 natural gas storage facilities would be full which would send the price to zero
- Any blip up in prices would simply result in a rapid increase in drilling which would crater the price all over again
It seems being contrarian is the way to go because Gundlach almost picked the exact bottom for his recommendation timing and natural gas prices have bounced from under $2 to almost $3.50.
Gundlach nailed both sides of his trade. His timing on the call turned out to be so prescient it is scary.
Will Shorting Apple and Going Long Natural Gas Work In 2013?
I would never short Apple, but as I wrote last year I have no interest in owning it either.
As I mentioned above, the reasons for not shorting Apple are obvious. The balance sheet is awesome, the multiple of earnings it trades at actually appears quite reasonable, and the loyalty of its customers borders on fanaticism.
My reason for not owning Apple is that Apple is just so successful and generates such enormous amounts of cash flow that achieving future growth or even simply maintaining current levels of performance simply has to be a very difficult task.
Adding to my concern is the fact that I just don't think I'm smart enough to predict with any reasonable certainly what Apple's business will look like ten years from now. This is a business that requires constant innovation and while it is hard to imagine Apple losing its loyal customer base it is possible.
So I'll take a pass on shorting Apple in 2013 and any year after that.
Natural gas on the other hand I do think will be a successful investment at current prices, although I'm not sure it will increase in 2013.
Why do I think that? Here are my reasons:
1) I don't care what anyone says, when the natural gas rig count drops from 1,000 to 400 it is going to impact production. It might take some time to work off the inventory of wells drilled but not yet producing, but this rig count is going to show up. The unconventional shale oil wells decline very rapidly and without a continuously high level of new wells being drilled production can't be maintained.
2) Natural gas production just doesn't work at the current prices. The vast majority of shale gas wells lose money at the current price. Don't take it from me, take it from the CEO of Exxon Mobil (XOM) who very honestly stated last summer that the entire industry was "losing its shirts" at current natural gas prices.
3) Growing industrial demand, growing transportation and natural gas export facilities. I don't know how much each of those three factors are going to impact the market but they will. There are already several gas to liquids and biofuel facilities in the works, we are seeing fleets of trucks being converted to CNG and both Canada and the United States will be exporting LNG by the end of the decade.
I'm not Jeff Gundlach, but over the long term (three to five years) I think natural gas prices have to at least increase by another 50% so that companies drilling the wells can make a return on investment. As for shorting Apple, I'll put that in my "too hard" pile.