Investors should look for a pullback in commodities soon, and it appears that the price action this morning is dictating that today may be the day that it starts. We say forget about trying to call a top here and getting back in on the way down, rather hold and then add to your best positions as we pullback. This scenario will have you looking back in a few months proud of yourself for wise trading/investing due to the fact your capital was not chasing prices higher. We think that a 5-10% pullback in commodity stocks would not be unreasonable and would purchase more exposure once that 5% threshold is met.
Oil & Natural Gas
We have to once again focus on Halcon Resources (HK) as the shares rose smartly on Friday. We stated in our article that morning that it was a buy at those levels and for those who did buy it for a trade and/or investment, good job! Now it is important to hold yourself to sticking with your initial reason for purchasing (whether this is a trade or investment). Shares rose $0.51 (7.13%) to close at $7.66/share on volume of 9.1 million shares after shares had fallen during the week to near the level where investors could purchase shares in the secondary.
Another winner as of late for readers is SandRidge Energy (SD) which traded 19.4 million shares as investors pushed the stock up $0.43 (5.87%) to close at $7.75/share. We are getting closer to that $10/share level we think is a fair value, but the company is doing a lot of work to help justify this rise and up until recently had been a laggard in the industry. We like the story here, still, and would recommend this as a long-term play on oil and natural gas moving forward. We like the company's plan to get to positive cash flow from operations and keep debt in check while developing its massive Mississippian Lime play and think that this could be a huge win moving forward if the extension is anything like their original acreage.
There was an article The Wall Street Journal had out, available only to paid subscribers, which discussed a massive land sale in Ohio's Utica play which could result in $6 billion in cash and/or assets being swapped. It is a massive number and a massive number of acres, but the land package is quite impressive. We suspect on the announcement of an official deal, shares of Chesapeake Energy (CHK) will rise as it revalues their assets indirectly as well as those which will be included that are in a joint venture together. Investors shall once again discover what hidden value the company has on its balance sheet and realize that the company truly has hit a home run with the Utica play. We have been talking about this for months, maybe even closer to years, and now -finally - the mainstream media is catching on.
AK Steel (AKS) saw shares fall $0.57 (8.85%) to close at $5.87/share with volume of 22 million shares after the company forecast a weaker 3rd quarter than previously expected. The company will be taking a charge, and lower steel prices have hurt them this year. This is a volatile stock we have been following, and thought with their price increase earlier this year that they may have had pricing power. That was not the case, and thus the weakness in the shares. The company was an industry laggard Friday and until they can demonstrate that their weak operating performance is over, we would expect shares to lag their industry peers.
AuRico (AUQ) continues higher, as shares rose another $0.49 (7.73%) to close at $6.83/share on volume of 3 million on Friday. The shares continue to move higher off of the lows set recently due to production issues - issues which we believe will be short-lived. Even with the recent bounce we still think the stock has further to run, a lot further. For investors looking to diversify their commodity exposure, we like this play as it can rise on more than just the gold price (i.e., production growth and property development) which we think lowers the risk of investing a good deal in commodity plays. A buy and hold strategy should work here as shares rise into the low to mid teens.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.