4 Contrarian Natural Gas Stocks

By Roberto Pedone

WINDERMERE, Florida ( Stockpickr) -- Being a contrarian investor can help market players rein in big profits on Wall Street. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricing in securities markets.

For example, when the S&P 500 was trading at 1040 recently, the investor sentiment readings were registering extremely bearish. On Aug. 26, when the S&P 500 was at the 1040-1050 level, the AAI measure of individual investor sentiment had bulls at 20.7, the lowest since March 2009.

Following that negative reading, the market did the exact opposite of what the crowd was expecting and soared higher, all the way up toward its current level around 1142. As you can see, contrarian investing can produce powerful returns.

Another market that could be setting up for a great contrarian trade is the natural gas complex. On Monday, Bloomberg.com reported that hedge funds had reduced their bullish bets on natural gas to the lowest level this year. This change is mostly due to mild weather and a lack of any significant hurricanes in the Gulf of Mexico.

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According to the article, hedge funds and other large speculators cut their bullish bets on natural gas by 16% as of Sept. 14. Natural gas is down 31% this year mainly due to rising production from shale formations and a supply gut that saw no significant impact from this year's extremely hot summer.

Since the hedge funds seem to be souring on the natural gas trade, it might be time to start looking for opportunities in the sector. Things could be setting up for a great contrarian play now that many of the large traders are starting to throw in the towel.

Also, a number of catalysts for natural gas could be on the horizon, including federal support of natural gas, threatened oil supplies in the Middle East due to geopolitical risks, reduced shale gas production and a potential storm that's developing in the Southeastern Caribbean Sea that could hurt production in the Gulf of Mexico.

Here 's a look at a number of natural gas stocks that could be setting up to make for great contrarian trades.

One natural gas stock that could be setting up to take off is Swift Energy ( SFY). This nat gas firm is engaged in developing, exploring, acquiring and operating oil and natural gas properties, with a focus on oil and natural gas reserves onshore and in the inland waters of Louisiana and Texas. The company focuses its development and exploration of fields in four areas: Southeast Louisiana, South Texas, Central Louisiana/East Texas and South Louisiana.

Swift Energy has a $1.03 billion market cap and trades at a price-to-book of 1.40. Unlike many other natural gas stocks, shares of Swift Energy are actually up year-to-date by over 13%. The stock started off the year around at around $24 and is now trading at just over $27 a share.

From a technical standpoint, the stock has huge support at around $25 a share. Since May, every time the stock has touched that level buyers have rushed in to defend the shares and move them higher. It now looks like the stock is setting up to make a run at the 200-day moving average of $28.62. A move above that level, and a move above $30, should send this stock up toward $34 a share, which is the next significant overhead resistance level.

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Keep in mind that more than 14% of the float is sold short as of Aug. 31, so a massive short-covering rally could occur that moves this name much higher. Short-covering could be set off if any decent fundamental catalysts I mentioned earlier take place.

Another natural gas that looks very attractive is Comstock Resources ( CRK). This company is engaged in the acquisition, development, production and exploration of oil and natural gas. The company's oil and gas operations are concentrated in East Texas/North Louisiana and the South Texas regions.

Comstock has a $1 billion market cap and trades at a price-to-book of 0.9. The stock has been absolutely annihilated this year, with shares dropping more than 47% from around $47.50 to its current price of around $21 a share.

From a technical standpoint, shares of Comstock have been in nasty downtrend all year, but the stock might finally be starting to find some support at around $20 a share. During the last two trading sessions, volume of 1.1 million and 1.8 million hit the tape as the stock moved higher. This is volume well above the three-month average daily action of around 882,000 shares.

>>>Who Owns Comstock?: John Keeley

If this stock can start to find some love form the bulls, the shorts, which make 15% of the float, could be forced to cover their positions. This would provide the added rocket fuel that could eventually send shares soaring back toward the high $20s.

If you're looking for a speculative stock to play a potential natural gas boom, then take a look at Delta Petroleum ( DPTR). This company and its subsidiaries engage in the exploration, acquisition, development, production and sale of natural gas and crude oil primarily in the Rocky Mountain and onshore Gulf Coast regions.

Delta has a market cap of $200.36 million and trades at a price-to-book of 0.38. So far this year, this stock has been a gigantic loser, with shares down 31% from about $1.55 to its current level of just 70 cents a share.

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From a technical standpoint, things could be looking up for Delta Petroleum. The stock just recently tested some former support at 67 cents a share, and so far the stock is holding above this key level. Since September, the stock has been bouncing around in range from 67 cents to 74 cents. If shares can manage to trade above the upper end at 74 cents and take out the 50-day moving average at 75.2 cents, then this stock could be setting up to soar higher.

This natural gas play is also heavily shorted, with more than 10% of the float in the control of the bears as of Aug 31. So any moves above the key technical levels I mentioned above could spark the mother of all short squeezes for Delta. However, if the stock breaks 67 cents, then you can forget about any bullish runs in the near future.

One last natural gas stock that could be presenting market players with a great buying opportunity is Devon Energy ( DVN), which with its subsidiaries is an independent energy company engaged primarily in exploration, development and production of natural gas and oil. Devon controls offshore operations in areas such as the Gulf of Mexico and regions located offshore in Azerbaijan, Brazil and China.

Devon has a market cap of $27 billion, trades at a price-to-book of 1.64 and has a dividend yield of 1%. The stock is down sharply year-to-date by 14% after shares started of the year at around $76 and now change hands at close to $63.

From a technical perspective, the stock has massive support at around $58 to $59 a share. Every time the stock has tested that level in the last four months, buyers have rushed in to defend this name and push it higher. Now, shares of Devon are trading right around the 50-day moving average of $62.75. A sustained move above that level with volume could kick off a march back toward the June highs at around $70 a share.

>>>Who Owns Devon?: T. Boone Pickens

However, I will point out that some big selling has been moving into the stock in the last couple of weeks, with two down days producing volume well over the three-month average daily action of 3.7 million. This could mean another test of support at $58 to $59 is in the cards, which would produce a great buying opportunity.

To see more natural gas stocks that could be setting up to rip higher, including Targa Resources Partners ( NGLS) and EOG Resources ( EOG), check out the Contrarian Natural Gas Stocks portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.

Stockpickr is a wholly owned subsidiary of TheStreet.com.

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