This Week on Wall Street: Are Natural Resources Due for a Turnaround?

by Samuel Taube, Research Correspondent, Investment U
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There’s never a slow week in the world of finance.

In the last few days, we learned that the U.S. will soon begin pulling out of the Paris Climate Agreement, for better or for worse.

Whether or not you liked the agreement, we can all agree that it will have some significant long-term effects on our resource and energy markets.

For now, though, there’s plenty of short-term upside in this potentially undervalued sector. That’s why Rick Rule, CEO of Sprott U.S. Holdings, recently sat down with The Oxford Club’s newest strategist, Eric Fry.

If you like Eric’s perspective, sign up for his free webinar on June 7. He’s launching a new trading service that’s unlike anything else the Club offers.

An Interview With Eric Fry, Macro Strategist, and Rick Rule, CEO of Sprott U.S. Holdings

ERIC: Rick, the natural resources sector has been pretty treacherous lately. So I thought I’d check in with you to hear your latest thoughts and find out what opportunities you might be seeing in this battered and bruised sector.

RICK: Yes, we’re definitely in a rough patch at the moment. But it’s times like these that create buying opportunities. We’re at a place now in the midst of a choppy market where the generalist financial institutions are getting redemptions from their clients. These institutions raise cash by selling off the stocks they understand the least, and those stocks are almost always in the natural resources sector.

Sometimes these institutions make some really spectacular mistakes. They dump some truly great resource stocks, which creates wonderful investment opportunities for those of us who understand what we’re buying.

ERIC: Okay, so let’s take a tour of the resource markets. What do you like right now?

RICK: I normally start portfolios from the least speculative names to the most speculative ones. So I would start by looking at Adams Natural Resources Fund (NYSE: PEO), which is a closed-end fund on the New York Stock Exchange.

ERIC: Yep, I think that’s an “oldie but goodie.”

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RICK: It’s really well-run, but the last time I looked, it was selling at a 14% discount to net asset value (NAV). And that discount amortizes a reasonable amount of sin.

There are times when the sector returns to favor and the thing actually sells at a premium to NAV. You understand that argument?

ERIC: Yes. I’ve been around closed-end funds since the 1980s. So I do know how that works. If you buy Adams at a 14% discount, for example, you’re buying its portfolio for $0.86 on the dollar. That creates some embedded leverage. So then if the stocks in the portfolio go up, and the fund’s discount to NAV narrows or closes entirely, you get a kind of “double win” on your investment.

RICK: Right. So Adams is something you might look at in terms of establishing positions. Next, I believe we’re beginning a renewed spending cycle in oil and gas, and not just in the shale plays. So I think people should look at the biggest and the best of the oil field services businesses as a consequence of that. Names like Halliburton (NYSE: HAL) and Schlumberger (NYSE: SLB) are appealing to me.

ERIC: Absolutely. I agree, and these big names are possibilities for options plays as well.

RICK: There is really quite a lot of good stuff in the market right now.

Big Earnings Reports: HD Supply and Vail Resorts

HD Supply (Nasdaq: HDS) will report earnings on Tuesday morning. The consensus earnings per share forecast for the industrial distributor is $0.65, $0.14 above the same quarter’s earnings last year.

Ski resort operator Vail Resorts (NYSE: MTN) will post its earnings on Thursday morning. Analysts are looking for EPS of $4.99. That’s $0.76 above this quarter’s EPS last year.

Both stocks have been trading up in the weeks leading up to the report. In Wall Street’s view, both are likely to beat expectations.

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In Case You Missed It Last Week

Any big stories we missed? Questions about the week ahead? Write to us in the comments section, and we’ll get back to you as soon as we can.