Micro-Cap Monday - Who Else Wants 59% On LNG?

By Bill Spencer May 2, 2022 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

Hi there. Big Bill here.

You don't need me to tell you: the market's been ugly of late.

The S&P 500 is down 13.8% this year. That's the worst performance to start a year since World War 2. The index lost -9% in April alone. The S&P hasn't fallen like that since we were all in lockdown.

And lest you think weakness is limited to the large cap ticker, take a look at this.

Here's a screenshot of the US Industry Bell Curve, one of the institutional-quality tools that comes bundled with Sector Prophets Pro, TMI's premium sector research and data platform. That market "snapshot" was taken after the market closed on Friday, April 29.

(Click any image to enlarge)

That sea of red is 44 sectors showing weakness over the short term. The one blue box represents the Forest Products Paper sector, the only industry group where the bulls are in control.

Here's a picture of the Bell Curve from one week earlier, on April 22. What a difference. Just one week ago the bulls controlled 18 sectors.

Eagle-eyed readers might notice that the Forest Products Paper is a commodity-related sector. Right now Commodities is literally the only game in town for bullish investors. (More about that in a moment.)

I mention that because with so few sectors showing strength, it can be a challenge to find attractive micro-cap stocks. The solution? Broaden our horizons a bit and instead fish in the small-cap commodities pond.

One of the stronger niches in the commodities space is liquid natural gas (LNG).

The 2022 LNG market is generally expected to see continued growth. This is especially true given the demand surges created by the Russian attack on Ukraine and the fact that Asian supply is dwindling.

Based in Bermuda, Golar LNG Limited (GLNG) provides infrastructure for the liquefaction, transportation, and regasification of LNG. It operates through Shipping, FLNG, and Power segments.

As of April 16, 2021, it operated ten LNG carriers.

Before we run the numbers, a brief detour. Not many investors are aware (I know I wasn't until I began researching GLNG) but Bermuda is actually a hotbed of international shipping finance and registration. This is because the island has a lot to offer the maritime industry. I mean things like...

  1. A stable, modern regulatory framework
  2. Lots of shipping expertise and technical support, forged over the past half century (not to mention Great banking, legal and accounting services.
  3. Sophisticated computer and IT infrastructure
  4. An attractive tax regime - Bermuda companies pay no income tax, profits tax or capital gains taxes.

Pretty cool, right?

The LNG market as a whole heated up in late 2021 and Q1 2022, when we saw the funds really move into GLNG.

Following two quarters where the giant hedge funds distributed (sold) more GLNG than they accumulated (bought), in Q4 2021 and G1 2022 the big institutions bought 4.69x more GLNG than they sold ($91 million versus $19.373 million).

Plus, over the past 12 months the number of funds participating has grown from 187 to 238 -- an increase of 27%.

The company has recently moved from negative to positive earnings. MarketSmith reports the following growth in GLNG's annual EPS.

2020:   -$1.01

2021:   -$1.44

2022E:  +$0.90

2023E: +$1.08

What's more, over the past two months, Wall Street has upgraded its earnings estimates for GLNG by more than 90%.

The company stacks up very well against its competitors. Here's a performance chart (aka a "perf" chart) showing GLNG's performance versus a basket of its peers.

Specifically, the chart below compares GLNG to: Teekay Tankers, Ltd. (TNK) (blue)... Teekay Corp (TK) (green)... Dynagas LNG Partners (DLNG) (lavender)... Navigator Holdings, Ltd. (NVGS) (turquoise)... and Frontline, Ltd. (FRO) (black).

Where might GLNG go?

Here's a daily 1-year chart of the stock. Between August 19, 2021 and April 14 2022 the stock gained 166% but has since pulled back about 16%. As of Friday's close GLNG traded at $22.32.

I've added Fibonacci retracements to the price action. If GLNG reaches its April 14 high, we'll see a return of 19%.

If it breaks out and achieves the 161.8% Fibo level (highlighted in yellow) then we'll have a gain of 35%.

If it manages to reach the 261.8% level (highlighted in purple) we'll have a gain of 59%.

You'd be right to wonder if, given GLNG's 166% intermediate-term run, whether we've missed the boat here. I don't think we have.

The bull market in commodities still has plenty of room to run. Earlier I said that Commodities was the only game in town. As you can see from the following Perf chart, which shows the relative performance of six asset classes versus cash in 2022... I didn't exaggerate.

And, to repeat what we said earlier, the LNG market will see continued growth in 2022 and beyond.

That said, here's a caveat. Last week Bloomberg was reporting that the U.K. was nearing its capacity to accept new LNG shipments. So a potential bottleneck in supply is not out of the question. That could put a crimp in GLNG's ability to service the growing demand for LNG.

Something to think about...

Have a great week.

Bill Spencer

Editor-in-Chief, True Market Insiders