This Resource Stock Is a Natural

09/28/2012 8:15 am EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

This domestic energy exploration and production company is really coming into its own, and now is a great time to get in on its stock, writes Mark Skousen of High-Income Alert.

We hit our sell stop on Omega Healthcare Investors (OHI) last week, locking in a short-term gain of nearly 23% after enjoying a couple of nice dividends. Total return on the call options was 53%.

My advice? Take the proceeds and put them to work in Vanguard Natural Resources (VNR).

This stock has nothing to do with the mutual fund giant. Based in Houston, Vanguard Natural Resources owns and operates oil and natural gas reserves in the Permian Basin in West Texas and New Mexico, the Big Horn Basin in Wyoming and Montana, the Williston Basin in North Dakota and Montana, and the Arkoma Basin in Arkansas and Oklahoma. The company has 1,459 productive wells and 71.9 million barrels of proven reserves of oil.

Vanguard’s primary objective is to generate stable cash flows to distribute to shareholders, and over time to increase cash distributions through the acquisition of new properties. Vanguard also engages in an actively managed hedging program, both to mitigate commodity price risk and lock in the accretive cash flows from acquisitions.

How has the company done? Since its initial public offering less than five years ago, Vanguard has grown its proven reserves of oil and natural gas more than 1,177%.

Other financial metrics look good, too. Earnings in the most recent quarter jumped 225%. Operating margins are 68%. Management is earning a healthy 21% return on equity. And the stock currently yields 8.5%, with dividends paid monthly.

This performance certainly has caught the attention of corporate insider Britt Pence. Last week, Pence invested $136,600 in the stock himself. You should follow his lead.

Pick up Vanguard Natural Resources. And place a protective stop at $22. If you prefer to play this one more aggressively, try the January $30 calls, which last traded at 50 cents.

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