This week I got a somewhat concerned email from a subscriber on some of our most discussed recent stocks, including Range Resources (RRC) and renewable energy ‘utility’ Constellation (CEG). In light of the small cap surge that we’ve seen in the markets, and the weakness of these two stocks during that time, it’s worth a moment to assess how our stocks are faring in a market that continues to streak towards new highs.
Let’s start with natural gas. Certainly the late spring and summer have not seen a strong showing for natural gas prices. Predictions for long-term heat waves that might have driven power prices upwards did not materialize, except for a short 4 day period in early July. And as shifts in global temperatures upwards have been influencing natural gas prices more in summer than in winter months, the trader’s disappointment in prices has been pretty clear, as the chart below shows:
Our natural gas stocks have reflected this disappointment, as stocks like Range Resources (RRC) has dropped from almost $40 a share in May to $31.50 now and EQT Corp. from $42 to $34. While this move has been equally disappointing, it has not been completely surprising. All of our natural gas stocks had staged magnificent rallies during the early spring when I was more bullish and have basically been giving back that ground since. And while I did not recommend selling these shares at the highs back in May, I certainly did not show any enthusiasm for the markets at the time, considering many of these issues to be overbought and advising close strike price options strategies and far preferring 5% treasury funds for spare cash over aggressive stock buying.
Similarly, renewables stocks have backtracked more than a bit during this period, particularly Constellation Energy, which reached a high of $220 a share and is now trading nearer to $175. Here, I was a bit more aggressive, advising buys near to $200 a share, but again taking advantage of close strike option selling on very high volatility. I have significant positions myself in both these natural gas and renewable shares and firmly believe that they are nearer to their period lows than beginning a long-term collapse. The waffling predictions of the Federal Reserve and their schedule for rate cuts, if they even come at all, has been working against these stocks particularly.
I’ve spoken in the past about 2024 being a ‘turning point’ in energy where the predominance of crude oil will finally start to be eclipsed by natural gas and renewables, and I maintain that belief today. But “revolutions” like this are always preceded by significant volatility and shake outs, especially when the thesis is pretty obvious. Most energy observers are convinced we are on the cusp of a renewables surge and retail investors have clearly gotten involved in these trades and often pushed them too high too soon. Short term influences can push volatility and turnover of these stocks even higher.
And it has been the short term inputs of a warm and dry, and not hot and humid summer, a Trump trade that emphasizes banks, Bitcoin, gun and prison stocks, oil over renewables and the Fed inaction that has led this move downwards in my opinion, working to chase some of this retail money all over the place – into the Russell 1000 stocks for example, and has confused the picture of the current energy market.
The bottom line is that the prices I see in these stocks are only moderating, taking a breath, but not collapsing. I continue to advise an call option selling strategy to maximize the returns of these shares over longer periods and especially at moments like these, minimize the interim losses. I am not, however, ready to advise a more aggressive ‘doubling down’ on these positions, because the initail prices we have on most of them from early in the year is still lower than where they are trading now, and because the technical indicators really look to be searching for an interim low on all of them (see above chart of CEG). We have also generated cash on our options on all of these issues during the first 6 months of the year, which we tend to forget as stock prices drift lower. That is the benefit of our strategy in play. I haven’t totaled up the gains we’ve accumulated on our core portfolio stocks in 2024 and like to wait until year end to do this so that it doesn’t influence my trading decisions mid-year. Still, I would bet while we’re definitely not pacing quite with the S&P in this very strange market year, we still are banking a quite acceptable double digit yearly return.
And as of today, all indications to me are that we’ll do at least equally well in the second half of the year, as long as we stay disciplined in the strategies we’ve laid out.
That’s all for this week
