When I worked at Lehman Brothers, famed strategist Elaine Garzarelli had a poster in her office of an article featuring her from a French publication. "J'achete!" was the headline. Translation: I buy.
That advice has come in handy the last two days, which were pretty typical of the experience of late at my firm Portfolio Guru, LLC. Portfolio Guru core holding GreenHunter Resources Series C preferreds (GRH-C) fell more than 30% on Monday and then bounced back 45% on Tuesday. Just normal volatility, I guess.
At the low Monday, GRH-C was trading at a ridiculous 40 cents on the dollar, a level that might be expected from a non-payer. The only problem is, GreenHunter is a payer, and in fact announced the declaration of its December dividend Monday afternoon.
At 40 cents on the dollar, GRH-C was yielding an astounding 25%. I bought as much as I could, mainly in the high-$10 range. It's almost surreal that, at that level, an investor would get more back in dividends in ONE MONTH than the S&P 500 pays in an entire year.
I'm in regular contact with Kirk Troisclair, Executive President and Chief Operating Officer of GreenHunter. Checking in with him this week, he reassured me that the company's business had not gone to hell in a handbasket in the space of a week and a half. I had already guessed that, but it was good to hear it from senior management.
Tuesday's trading action confirmed what I had surmised: Energy preferreds have been subject to an attack by short-sellers, a.k.a. a bear raid. Tuesday was the mother of all short-covering rallies among energy sector preferreds. As the overall market plummeted (it rebounded late) my core names GRH-C, Gastar Exploration Series A and B (GST-A, GST-B), Magnum Hunter Resources Series C, D and E (MHR-C, MHR-D, MHR-E), and even Miller Energy Resources Series C and D (MILL-C, MILL-D) showed massive gains.
Oil futures showed a decent gain after a torturous slide through $63, and I would attribute that to short-covering, as well. The Shanghai Composite started to dive (ended down 5.4%) after the Chinese government tightened collateral restrictions, and panic selling produced panic buying among my names.
Clearly, some short/shorts' longs started to crumble and they had to cover shorts to secure capital. I also noticed strong performances by Portfolio Guru favorites outside the energy sector, such as True Drinks Holdings (TRUU) and Second Sight Medical Products (EYES). These stocks have been battered over the last few weeks and, again, Tuesday's action confirmed that it has been the shorts causing the pain, not long holders selling.
So, Tuesday was a really good day after several weeks in which there was more pain than gain. But there is more to go. GRH-C was trading at a premium to par as recently as two months ago.
Trosclair confirmed to me that activity remains strong, as core customers like EQT Corp. (EQT) and XTO Energy continue to drill for gas. The slide in natural gas to $3.65 has been really puzzling to me, and the recovery on Tuesday tells me natgas futures were being shorted by the same traders who were shorting oil.
Despite what articles in the mainstream media would indicate, the U.S. is not swimming in natural gas. A simple glance at this chart shows the fracing boom (any article that spells "frack" with a "k" should be immediately dismissed, by the way) has not produced a glut of natural gas. Recent quarters' GDP data, showing that the U.S. economy is running at a crisp 3.5%-4.0% pace, and an approaching winter storm in the Northeast are constructive (or should be) for natural gas demand, and hence prices.
According to Troisclair, management teams at EQT and XTO have indicated they would keep drilling down to $2.50/Mcf gas, as lifting costs in that region are in the $0.20-$0.30/Mcf area.
OPEC can't fool with U.S. natural gas markets, and companies that drill for gas (e.g., Magnum Hunter and Gastar) or service those that do (e.g., GreenHunter) are going to be just fine, no matter what the preferreds may do on any given day.
When the short-sellers give me yields greater than 20% in companies I believe in, J'achete!
