Why I Like Smaller Natural Gas Stocks Right Now …

Our in-house natural resource expert Sean Brodrick has been following a major new trend in the energy markets, and today I’ve asked him to explain his investing strategy, which favors small-cap stocks over some bigger names in the energy sector. — Martin

U.S. natural gas prices are currently trading near ten-year lows. And while most investors think that makes natural gas stocks a bad bet right now, they couldn’t be more wrong!

In fact, along with select small-cap oil companies, I believe smaller natural gas companies are a screaming buy right now.

For starters, I expect natural gas prices to rebound from here — in oil terms, the commodity is trading at just $14 a barrel right now!

But what’s more important to understand is that there is a world of difference between the underlying commodity and the companies that are involved with producing it, transporting it, and finding new ways to capitalize on its current affordability.

Foreign investors and governments certainly recognize this! That’s why they’re not waiting around — they’re already pouring money into the American oil & gas industry hand over fist — spending more than $37 billion just in the third quarter of last year alone!

They’re funding every new project they can get their hands on. They’re looking to lock down supplies of cheap, America oil and gas for decades to come. And they’re snatching up every promising small energy company they can find.

This flood of foreign cash is already driving some lesser-known energy investments through the roof, and it’s even spilling over into neighboring Canada … where — since 2009 — China’s state-owned oil companies have invested $16 billion in new forms of fuel like shale oil and gas.

This is the real, concrete proof of the “New Fuel Revolution” I’ve been telling you so much about lately.

Okay, But Why Favor SMALLER Energy Stocks Specifically?

Well first off, countries like China aren’t putting their money in “big oil” companies like Exxon or BP. Instead, they’re investing billions of dollars in small-cap natural gas companies that have decades of profit potential.

These companies are on the cutting edge in terms of technologies and new techniques … just as it’s always been the smaller Internet companies that redefine our experience of the Web.

And with billions in fresh investment from foreign countries, these eager little companies are poised to make the very most out of a transition in global energy standards.

Plus, from our perspective as investors, it doesn’t take much to move smaller stocks. In fact, a single new innovation or just one new discovery could send a small cap soaring!

Alon U.S. Energy Partners is a great example of what I’m talking about. After a rough year for most of 2011, the company surprised the market when it turned a substantial profit and began paying a dividend in the third quarter.

The market reacted almost immediately … and as you can see, they sent the stock absolutely soaring … for a quick gain of 56.8% in just over two weeks!

This is the kind of upshot you just don’t see when you buy bigger, better-known stocks.

And let me tell you — I think we’re going to see a lot of smaller natural gas stocks start moving like this in 2012.

Of course, not all of them will. So the next logical question is …

How Can You Figure Out Which Small Caps
Are the Ones That Are Going to Explode in Value?

I know from experience that virtually the only way to consistently get a leg up on most investors is through relentless research … even if it means checking out these smaller resource companies in person … to find the ones that are on the verge of breakthroughs!

For starters, the vast majority of the world’s analysts and investors aren’t even looking at these companies …

For example, there are 27 professional analysts following ExxonMobil right now. Every tick, every public announcement, practically the whole world knows what’s happening with this company.

Meanwhile, only THREE analysts are providing price targets on a stock that I consider central to the “new fuel revolution.” Just three!

But the most important part is that even the Wall Streeters who DO follow these smaller resource companies have no idea how to actually separate the wheat from the chaff …

You see, most of these analysts are just glorified accountants. They read a balance sheet from an energy operation, and they think they understand what’s going on.

But that’s just not how it works with smaller resource companies on the cutting edge!

You’ve got to talk to the executives. You’ve got to visit them in person, even if it means crazy helicopter rides or nights spent in chilly Arctic cabins. And sometimes you’ve got to literally go down into the mines … peer into the wells … or drive along the pipeline in person.

That’s exactly what I did with Aurcana, a small-cap resource company that I visited in 2010 …

I felt like there was a turnaround on the way … so I hopped on a plane, took the first bus up a treacherous mountain slope, and I checked it all out for myself.

I saw the operation in person. And then I spoke with the CEO, the Senior VP, and the VP of exploration, and I quickly realized these guys were on to something big. So I fired off a recommendation to my readers before I even left the property.

All my effort was worth it because that recommendation soared by 158%!

But even with my biggest winners, I have to admit that I DO sometimes get a little help from the big guys because …

When You Buy Smaller Companies Early, You Often
See Your Shares Soar Once the Big Money Moves In!

Sure, there are some big-money investors that specialize in smaller companies. But in reality, the vast majority of investors are focused solely on large caps.

Take mutual funds. Many of them are actually PROHIBITED from buying companies with share prices under $5.

But as soon as one of these small caps starts taking off … as soon as a positive piece of news hits the wire … or the share price gets high enough for the funds to pile in … you could potentially see billions of new investment dollars start pouring in … sending share prices doubling and tripling in short order!

So small-cap stocks are one of the rare corners of the market where individual investors like us have an ADVANTAGE over the big boys … because we can get in on the ground floor … before the big money can.

And by putting a relatively small amount into a handful of smaller resource companies … we are perfectly positioned to reap very, very large returns once the Wall Street crowd shows up.

That kind of profit potential is exactly what small caps deliver.

Time and time again, small-cap indices have trounced larger stocks — proving that it’s easier for you to make a fortune with select small-cap natural resource stocks than if you just stick to their larger counterparts.

And I’m not just talking about the last few years … this has been true for nearly a century!

Take a look at this chart, which compares small-cap value stocks to large-cap growth stocks.

As you can see, it’s simply no contest …

If you’d invested $10,000 in an index of large-cap growth stocks back in 1926, you’d be sitting on nearly $10 million today. Not bad …

But with that same $10,000 investment, an index of small-cap value stocks would be worth more than a billion dollars!

There’s just no comparison: Small caps SMASH large-cap stocks in returns … and that’s even truer in trickier markets like the one we have now …

A recent study from the University of Chicago looked at 182 periods during which the stock market created average or lower-than-average returns, and they found that small caps outperformed large caps 95% of the time!

What’s more, the same study concluded that smaller companies are the first to rocket higher once new bull markets begin!

All this has convinced me we now have a huge NEW opportunity in smaller resource stocks … especially those companies involved in America’s “new fuel revolution.”

So if you haven’t taken a closer look at smaller energy stocks lately, I encourage you to do so right now — especially those companies that are involved in the areas of natural gas and domestic oil production. I think you’ll be extremely glad you did!

Yours for trading profits,

Sean Brodrick