The Ultimate Contrarian Play?

Want to know how to make a fortune in investing? It's actually pretty easy: Buy low and sell high.

If only it were that simple in real life. Buying low means making a decision to invest with a company or industry that's highly out of favor and no one else will go near. Selling high means backing out of the party just as everyone is heaping praise on your company. The psychological barriers to actually pulling this off in real life are immense.

Maybe that helps explain why so many scoffed at the call hedge fund manager Jeff Gundlach made last week: "If I were one of the nutty hedge fund guys, I would go short Apple, long natural gas, and leverage it 100x."

Not that Gundlach is actually considering doing that, but I thought it would be worthy to investigate whether such a call had any merit. Below, I'll let you know what I think, and I'll be setting up a CAPS profile to track my performance on this call. At the end, I'll also offer you access to a special free report on the only energy stock you'll ever need.

Short Apple?
Let's get one thing out of the way before diving in any further. I simply don't think shorting Apple would be a good idea. The company is showing no signs of slowing down on its incredible growth over the last decade. iPhone sales continue to be out of this world, and the company is sitting on a mountain of cash.

Sure, it's entirely possible that the company's days of leading the tech sector in innovation are over. But without any specific information to back that assertion up, you'd simply be gambling with your money -- not investing it -- by shorting Apple.

But he may have a point with natural gas
When it comes to natural gas, however, I think Gundlach may well have a point. Yes, prices for natural gas are at historical lows right now, but if you take a systematic approach to thinking about the situation, you'll see that this isn't necessarily a long-term problem.

This is overly simplistic, but it illustrates an important reality. Surely, cheap natural gas has been a drag on the companies that extract it. Natural gas leader Chesapeake Energy (NYSE: CHK  ) announced it was cutting back on production earlier this year. And SandRidge Energy (NYSE: SD  ) has increased its focus on oil while cutting back on natural gas production.

But low prices have been a boon for companies that can profit from the situation. Westport Innovations (Nasdaq: WPRT  ) , a company that designs natural gas engines, is up 70% in the last two years -- and cheap natural gas has a lot to do with it. Clean Energy Fuels (Nasdaq: CLNE  ) , which aims to build out "America's Natural Gas Highway," is likewise up an impressive 44% since the year began.

While Westport and Clean Energy are busy helping to build out the infrastructure and gain customers for natural gas vehicles, demand should pick up. Depending on the success of their efforts -- and on the spread between oil prices and natural gas prices -- more and more people will need access to natural gas. This, of course, leads to higher prices for the commodity.

There's a lot that could happen over the next 10 years, but I'm willing to wager that a bet on natural gas companies right now would be a perfect play if your time horizon is that long. Not only do we seem to be at the sweet spot in the above cycle -- which means natural gas stock prices are likely at their lowest -- but natural gas will soon be exported to countries where it's far more expensive. This will also help drive demand.

Some actionable advice
As I stated above, I'll be starting a CAPS profile to test my hypothesis that now would be a good time to invest in natural gas companies. I've chosen fifteen to put in the portfolio; most of them are natural gas extractors, but there are some peripheral plays as well. For instance, Heckmann (NYSE: HEK  ) which is the first-mover among companies vying to be responsible for the disposal of waste water caused by the fracking process, also has its future tied tightly to the price of natural gas. Simply click here to see the portfolio.

But, if following all of these companies seems like too dizzying a task, be not afraid. The Motley Fool's top analysts have already selected the only energy stock you'll ever need. Inside a special free report, you'll find out which company this is, and why it will succeed no matter what the energy of our future is. Get your copy of the report today, absolutely free.

Fool contributor Brian Stoffel owns shares of Apple and Westport Innovations. You can follow him on Twitter, where he goes by TMFStoffel.

The Motley Fool owns shares of Westport Innovations, Apple, and Heckmann. Motley Fool newsletter services have recommended buying shares of Apple, Westport Innovations, Chesapeake Energy, and Clean Energy Fuels, and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (9) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 03, 2012, at 9:11 PM, luckyagain wrote:

    Apple seems to defy gravity and keep going up. Does anyone remember when Apple was broke and only an investment of $150 million by Microsoft in 1997 kept them alive? So what goes up can come down.

    Natural gas is probably a good long term investment but it will surely be bumpy over the next few years until demand catches up with supply. It will take a strong stomach to invest in it now. What would be a good NG investment? UNG?

  • Report this Comment On May 04, 2012, at 11:01 AM, TMFCheesehead wrote:

    @luckyagain-

    You can check out the CAPS portfolio I built here for ideas.

    http://caps.fool.com/player/natgas2012.aspx

    Brian Stoffel

  • Report this Comment On May 04, 2012, at 11:55 AM, frankc1949 wrote:

    While you may be correct about the "demand pull" potential for natural gas, it will require patience. With finding costs, depending on the geographical region, finding and development costs run between $4.00 - $6.00 per mcf. Thus, it doesn't make sense to drill and produce until the long term market price demonstrates there is a profit to be made. Some industry analysts believe it is a minimum of three years before this will happen.

  • Report this Comment On May 04, 2012, at 11:58 AM, TMFCheesehead wrote:

    frankc1949-

    If you're taking the decades approach I'm talking about, three years sounds just fine to me.

    Brian Stoffel

  • Report this Comment On May 04, 2012, at 12:40 PM, totallyoblivious wrote:

    I'm definitely paying attention to natural gas, but I think it's still a little too early to buy producers. While I do believe the shortage while drive a transition to using NG in more applications, the infrastructure isn't going to appear overnight and the producers are in a position where they really need it to.

  • Report this Comment On May 07, 2012, at 8:52 PM, Wade32ru wrote:

    Nice article. I think now is exactly the time to begin building positions in the natural gas E&Ps. True, we are not going to see demand catch up with supply for some years to come, but we don't want to wait for that to happen either as the stock prices will then reflect that new reality. IMHO, its best do it now while nat gas prices are at historic lows.

  • Report this Comment On May 11, 2012, at 9:49 AM, jfrankh57 wrote:

    NatGas...you can lay a story since the 1800's about this commodity. It wans and ebbs. Price points are definitely attractive at this time for producers. CHK is 50% if its recent highs. It is possible for the price point to dip more, the fall of Enron dropped CHK into the the signal digits back around 2002. I remember trading WMB back then around $0.34 and it rose to $30+ in 2007. Strong players with decent cash flows will always be worthwhile to invest in until they are overpriced. Yes, the horizon will potentially be years, but you also have a dividend to like and enjoy along the way.

  • Report this Comment On May 11, 2012, at 3:24 PM, clbjblk wrote:

    Hek is a nice back up but playing with water is and will always be a tree huggers complaint you will never convince them it is pure again even though they drink water down stream from some water plant where do they think that water came from .Gasfrac is cheap as can be and the process is getting safer and the clients are in line just have a little higher ins. premium there 2 yr contracts with some big private players pulled them to TX and they have proven they get more out of the hole a lot more, they are moving more iron in which is slang for equip. and have more being made it is a big horse power need, and they are a lot closer to Houston so the Cushing depot will not eat at there clients cash sorry keystone soon some day to be after the Obama why did the chicken cross the road plan.Gasfrac's only kick is they threw a wrench at the Euro's and now they will have to wait , they can't pay anyway at least we can borrow some more YUAN Hek will be a better play up north but south and west TX is a whole new game heck they could be there own country just the contract with the Blacks will Brush off the dust and they have there own private pipeline and land up the you know. I would play them both HEK and GSFVF the real call is who gets bought out first I think I know unless a big boy needs some body to clean there water to make the EPA happy GASFRAC will look a lot different a year from now that sure is a nice group of patents all you have to do is call the people they did work for why do they all want them back. Hek will be buddies with Hess and the San Antonio Rose Valero and little old GASFRAC will have a home away from home it is just to bad that Obama is taking our neighbor up north and keeping his promise to China when the US and CANADA have all this dry and wet gas because THE head FOOL'S pick WPRT would be shining brighter than it is which is good for WPRT but it could have been rolling right now which would have helped a lot of people get work but that is politics T B Pickens and WPRT are still going to go through roof they will probably get more $ now even that fuel station builder would all agree that this clean fuel highway should have been done long ago your caps policy will shine either way we use nat gas here and grow the economy or is it gets shipped 1/2 around the world and they pay 5 times the price of what it cost here you can not loose either way.Good article but there are so many political behind the door deals and a leader who never had a clue I think he likes to buy things that say made in China hand shakes are old fashioned bowing down take your shoes off come on in now by the way how much is that Apple now that is infrastructure . How many shares of Mitsubishi does it take to buy a supper tanker, Canada knows they already did the 1.2 bil $ and that is just the start KORGAS, CHINA, ASIA, etc. are not buying a lot of business lunches in BC for the travel industry it is called pipeline food, sure it is 20 year money that is the max lifespan of the US currency, it is already 40+ cents on the dollar now,grand kids are gonna like that.

  • Report this Comment On November 25, 2012, at 8:02 PM, jwlarson3 wrote:

    Looks like shorting Apple in May 2012 would have been a pretty good idea after all. Hindsight will get you every time. If only you could tell ahead of time when people are feeling skittish about well performing companies before hand. I guess that's the rub isn't it!

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