Portfolio Manager Perspectives

Jeff Benjamin

Gas sector ‘stinks,’ but rally likely, says Harry Rady

Money manager says it will take only a bit of good news to drive natural-gas stocks higher

Sep 20, 2010 @ 10:46 am

By Jeff Benjamin

The market’s negative sentiment toward the energy sector has created a strong buying opportunity in the natural-gas space, according to Harry Rady, manager of the Rady Contrarian Long/Short Fund Ticker:(RADIX).

Mr. Rady, who manages $270 million as chief executive of Rady Asset Management LLC, agrees with the general consensus that the fundamentals in the natural-gas sector “stink.” But he also believes that the market has gone too far in downgrading many of the natural-gas companies.

“Given the low level of prices and the negative sentiment right now, it will only take a little bit of good news to force money managers to start covering shorts and drive a rally in natural-gas stocks,” he said.

Much of the market is focused on the declining price of natural gas, currently at around $4 per British thermal unit. That compares with $11 per BTU in June 2008.

The commodity’s tendency toward volatility was illustrated last fall when the price spiked 22% to $6.60 per BTU between Sept. 4 and Oct. 20.

“There are so many variables that can drive the price of natural gas, and that makes it a very volatile commodity,” Mr. Rady said. “A relatively small movement in natural-gas prices could translate to a big move by [natural-gas-company] stocks, and the bearish sentiment has driven prices so low that people are forgetting how quickly things can change.”

Energy now represents 25% of Mr. Rady’s portfolio, and two-thirds of that energy allocation is dedicated to natural-gas stocks.

One of his biggest holdings is Chesapeake Energy Corp. Ticker:(CHK), which has seen its stock price decline by more than 70% since June 2008 to around $21.

“The stock prices are discounting today’s [natural-gas] prices into the future, which is why natural-gas prices don’t have to increase much to drive stock prices higher,” he said. “The empirical data show that people get surprises regularly, and the unexpected should be expected in this space, because at least a couple times a year, we get something that affects the equilibrium in this area.”

Another energy play is Cobalt International Energy Inc. Ticker:(CIE), a company that is mostly in oil drilling and exploration.

This stock, which has fallen by 50% since January to around $8 per share, is uniquely exposed to President Barack Obama’s drilling moratorium in the Gulf of Mexico; Cobalt was getting ready to start drilling when the moratorium was introduced, and never got started.

“This is a situation where the market overreacted,” Mr. Rady said. “Even if it takes two years for drilling to return to the gulf, the company’s proven reserves places the stock at $20 per share, which means the assets are worth two or three times the current stock price.”

He acknowledged that “time is money,” but said Cobalt has enough money to wait out the moratorium.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.


What do you think?

View comments

Most watched


Finding your edge from Tony Robbins

Guru Tony Robbins has helped a lot of people, but armed with his psychology Financial Advisor Josh Nelson has helped his practice soar.


Finding innovation in your firm

Adam Holt of AssetMap explains how advisers understand they need to grow, but great innovation may be lurking right under your nose.

Latest news & opinion

Tony Robbins loses role with RIA amid charges of sexual misconduct

String of allegations costs the self-help guru his gig as chief of investor psychology at Creative Planning.

SEC sets June 5 date for vote on Regulation Best Interest

Commission adds new item to agenda: Interpretation of broker guidance that qualifies as advice

House passes SECURE retirement bill with massive bipartisan support

The measure allows small employers to band together to offer plans and raises the RMD age. Another provision eases use of annuities in 401(k)s, which critics say goes too far

10 IBDs with the most annuity revenue

Here are the independent broker-dealers that brought in the most annuity revenue last year.

DOL sets date to propose new fiduciary rule

The regulation, expected in December, likely will be contoured to the SEC's new advice standards.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print