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Why the World's Best Short-Seller Is Shorting an American FavoriteBy Frank Curzio, editor, Small Stock SpecialistFriday, October 21, 2011 ExxonMobil is one of America's most widely held stocks.
There's a reason so many institutions (aka the "smart money") own it. Exxon generates more profit than any other company in the S&P 500. It's also a cash-flow machine.
Today, the stock is trading at a 25% discount to the S&P 500, based on its forward price-to-earnings ratio. It also pays a 2.5% dividend – more than the 10-year Treasury. It seems like a no-brainer investment right now.
But Jim Chanos believes Exxon is in trouble. Chanos is one of the world's best short-sellers. He's made a fortune betting against other widely-held companies like Tyco and Enron.
I don't know if Chanos will make money on his short position in Exxon. What I do know is that the same forces working against Exxon are working for a group of small-cap energy companies...
I attended the Value Investing Congress this week, and Chanos presented his Exxon short. His thesis is based on higher costs, political risk, and a slowdown in production. In other words, Exxon will have a difficult time replacing its reserves at the same rate it has in the past.
You can't see the deterioration of Exxon's reserves by looking at its annual report. But that's only because the company is spending billions of dollars to buy natural gas assets and keep its numbers high.
Exxon is not the only integrated oil company that will have problems replacing reserves. The good news is most of these giants have billions of dollars on their balance sheets to spend. Even better, most small-cap natural gas companies are down 20%-plus following the recent pullback.
In other words, conditions are near perfect to buy small-cap natural gas companies.
Take Brigham Exploration. The natural gas producer has a huge asset base in the Bakken region in North Dakota. The stock pulled back sharply along with the markets in September. Statoil used the pullback as a buying opportunity. The integrated oil giant paid $4.7 billion to purchase Brigham last week.
I have a feeling we will see a lot more acquisitions in the natural gas space in the weeks and months ahead.
Chanos may turn out to be dead-right on Exxon and most of the large-cap integrated oil companies. But the better short-term play is to buy small-cap natural gas companies with quality assets in regions like the Eagle Ford, Bakken, Marcellus, and Utica.
These companies are still trading sharply off their highs. They are also being stalked by some of the biggest energy companies in the world.
Good investing,
Frank Curzio
Further Reading:
Steve Cohen is one of the best stock-pickers on the planet, averaging more than 30% returns annually for his clients. That's why Frank keeps tabs on what Cohen is buying. And right now, Cohen is making some interesting energy bets... Get the story here.
Many resource stocks got butchered during the recent selloff. But one little-known commodity investment has, amazingly, "sailed" through the massacre. This cheap company is a great way to collect low-risk income in a bear market... and has tremendous upside from here.
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