Why Natural-Gas Plays Show Potential

04/12/2012 7:00 am EST

Focus: STOCKS

Cheap natural gas prices bode well for companies using that fuel source, says advisor Fred Richards. He also discusses how the bigger economic and macro pictures could affect investors this election year, and how investors should handle Apple.

Kate Stalter: Today, I’m on the phone with Fred Richards. Fred, I’m a regular reader of your Market Musings, and I know that you’ve been tracking a lot of the selling in the major indexes well before the plunge that we saw this week.

Can you say a little bit about what you’re seeing? I know a lot of people have talked about the Fed money that’s been going into the market, which has been prompting a lot of these gains lately.

Fred Richards: Well, I think that’s true. I sort of look at what’s happened today and yesterday as being like a steam engine. Yesterday, it sort of ran out of steam. And then today, they blew the emergency tank, and it didn’t do anything because the market ended, after coming out of Asia and Europe, being down.

It continued to go down and it closed at the bottom of the day, for all practical purposes. It’s now a question of how far is it going to go? Are we going to get some more? But, you know&hellipit certainly didn’t look very healthful today.

Kate Stalter: Fred, as I mentioned a moment ago, you track indicators for market timing, but a lot of people try to be “buy and hold” investors. What would be your suggestion to people at this juncture, as we’re seeing this correction?

Fred Richards: Well, if you’ve got good stocks and got substantial profits in them, then I don’t think there’s anything to be worried about at this point in time. Except really, the question is: Where is the economy going?

The economy has been fueled, really since 2004, in sort of a recession. And we’ve got Europe going back into recession, which will affect all of the countries that export to them.

We’re sort of out here by ourselves in the United States, theoretically thinking we’re doing alright, as some people say “just muddling through.” But I’m beginning to worry about even the “muddling through” part, because all of the money that has been thrown into the economy worldwide is now up to over $10 trillion, and you don’t solve a debt problem by adding more debt.

Where we are today is in that situation. And most small businesses that I talk to are facing uncertainty over what the tax situation is going to be next year, and they’re facing, as it is currently situated, their largest tax increases in history. And that doesn’t give you very much—how can I say it—confidence in going out and hiring people.

Our big problem is we’ve got 46 million people on food stamps, and if you look at the labor participation rate, we’re down at the lowest levels we’ve been at in years. What’s going to happen if those people come back into the market? One of the things that’s going to happen is they aren’t going to be able to find jobs, because a lot of the jobs have gone beyond their skill levels, and that’s the scary part.

Kate Stalter: You know, it is easy, as you suggest, to get scared looking at the bigger picture. When you’re talking to your clients and your subscribers, what are the actionable steps that you’re suggesting for them at this time?

Fred Richards: Well, we said that we ought to look at those companies that are going to benefit from low natural-gas prices, because we think that the price of natural gas, which is now down around $2 per MCF, is probably going remain low for some period of time.

Those companies that use that as a fuel stock or as an energy base are going to do pretty well in the forthcoming economy, irrespective of what happens to that point in time. The labor costs are not a factor, but their fuel costs are just basically cut in half or more. So that’s going to be an area that’s probably going to have substantial profits going forward, and they should benefit greatly from this situation.

Also, those companies that have low interest charges, or low debt, will probably also benefit. Because companies with higher debt will probably get whammed as interest costs go up.

I think the situation that just happened last week, with Egan Jones downgrading us to AA from AA+ on US Treasuries, as well as the situation over in Europe where both Germany and Austria’s central banks said they were not going to take Spain, Portugal’s or Greece’s sovereign debt as collateral, it creates a whole different ballgame over there in Europe, and it could backfire back here in the United States.

Kate Stalter: Any particular stocks or ETFs that you believe people might take a look at right now?

Fred Richards: Well, a lot of the stocks that we’ve been looking at are all the fertilizer stocks and those stocks that make plastics, because they use a lot of natural gas. So, any company that’s in the chemical field would be something we’d look at.

Kate Stalter: How about ETFs, is that something that you would suggest?

Fred Richards: Well, I just don’t look at ETFs at all. That’s not my bailiwick.

Kate Stalter: Right. So, really you suggest that people stay with individual stocks?

Fred Richards: Yeah.

Kate Stalter: However, at this point, be extraordinarily cautious.

Fred Richards: Oh, yes. I think you have to be. In fact, our indicators went negative this morning, as soon as the market went south. All of our simple timing indicators went negative. We shorted the SPY and QQQ this morning.

Kate Stalter: Let me just wrap up today with the stock that, of course, everybody talks about. It has been the big growth leader, and did show some selling today after rallying to some new highs. That, of course, is Apple (AAPL). What would be your take on that stock right now, Fred?

Fred Richards: My take is that it’s got a great future, but I think it’s also fully priced. And in an uncertain economy going forward, I think you have to perhaps realize this is an election year, which will basically throw out all, shall we say, logic.

This stock can up or it can go down. I think if you’ve got profits in it, it wouldn’t be unwise to take some. I don’t think I’d make a new investment in it at this point in time.

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