Any well balanced and properly managed fund or portfolio has a few basic requirements. At the minimum these requirements include safety positions, growth positions, value positions and some speculative positions with the potential to give you 200%-300% returns over the medium term. That’s right, I said every portfolio should have some speculative stock(s) with potential for huge returns. The fund I run usually allocates approximately 5% of AUM to this portion of our portfolio. Currently we only hold a few stocks in our speculative portion and today I am going to show you why this one stock is mandatory for any portfolio regardless of how small a position you take on it.
As we all know the current commodity holding the throne for energy across the globe is oil. Oil is used to make everything. Once every decade or so (if you have been following this as long as I have) you notice a sort of “supply shock cycle” where someone comes out and says “were running out of oil, blah blah blah.” Every single time this happens I just laugh. To my knowledge necessity is the biggest driver of innovation and technological advance. Every decade this cycle comes around and new technology for new methods for drilling come a year later and magically tons of oil is now accessible.
Now if a barrel of oil traded here in the U.S. for $50 and that same exact barrel of oil traded in Asia for $200 what would be the most logical thing to do? I think people would load up as much oil on the largest ship they can find and ship over to Asia secure that enormous profit. Did you realize that natural gas trades here for $4 and in other places in the world for as high as $14? Logically, if it were easy, we would export as much natural gas as possible and make billions, right? Especially since the U.S. has the largest supply of natural gas and it is growing by the minute. The price discrepancy alone shows the lack of global supply. The only problem is that natural gas needs to be chilled to some -200 something degrees to be transported. Once upon a time some “genius” came up with the idea that although the U.S. has massive quantities of natural gas they would decide to open an import facility in Texas to import even more. This is clearly the dumbest idea anyone could come up with and if you look at Cheniere Energy (LNG) you’ll notice that from the high of $42.50 in 2006 the company now trades at less than $8. That glorious trend clearly reflects the stupidity behind its business model and I have made a significant return shorting this stock.
As part of my research for any position I listen to all the conference calls and all the published nonsense just in case there is vital information to pick up. About one year ago LNG began discussing the prospects of exporting natural gas. When I compared prices around the globe the opportunity for theoretical arbitrage (net of storage and shipping costs, etc) was literally sickening. The company finally began to wake up and realize it could make vast fortunes exporting instead of importing. Since then LNG has begun to get the necessary approvals from the Department of Energy. I began buying LNG in December 2010 and bought again after the horrible earnings in March 2011. The company talked about its debt and after a little math it is pretty clear that if this company can’t do anything (and do it fast) bankruptcy is imminent. Then finally the clouds parted and it received some approval from the DOE in May 2011, sending the stock to $11 from around the $8 it traded at in the matter of two days. LNG is awaiting one last approval before it can finish the process of changing to an exporter of natural gas.
The way I see it LNG is either bought out after it receives final approval (at a handsome premium), or it finds the funding to export natural gas generating stock price appreciation for years to come, or the company goes bankrupt by the end of the 2012. LNG has a market cap of less than $650 million and most oil and gas companies wouldn’t bat an eyelash at paying $2 billion for it after approvals. I recommend buying the stock long and purchasing some put options just in case the unthinkable happens.
Disclosure: I am long LNG.
