2023-04-20 12:28:27 ET
Summary
- Natural gas prices plunged from near $10 in June last year to barely above $2 today.
- I see value in the FCG sell-down.
- With a low valuation multiple and a high yield, I identify a positive risk/reward play.
Natural gas prices have plunged from year-ago levels. Recall Q2 2022 when so many analysts had called for double-digit prompt-month natty. Alas, the cure for high prices in the industry is often high prices. Moreover, a bearish winter in both the U.S. and Europe capped prices due to ample supplies coming into the shoulder months that we now experience.
I see shares of FCG as undervalued and there is an opportunity to be long this high-yield, MLP-exposed, fund.
Natty G: Drops Back To $2, Holding There
According to the issuer , the First Trust Natural Gas ETF (FCG) holds exchange-listed companies that derive a substantial portion of their revenues from the exploration and production of natural gas. Companies whose natural gas proved reserves do not meet certain requirements are eliminated from the index that FCG tracks. To meet Index eligibility, a stock must also satisfy market capitalization, liquidity, and weighting concentration requirements. The fund is optimized for liquidity and market cap while rebalancing occurs quarterly.
With a more than 15-year history, the ETF features a 0.60% annual net expense ratio and has decent tradeability metrics - its median 30-day bid/ask spread is just four basis points while the 30-day average volume is nearly 400,000. FCG holds 48 positions with total assets under management of $559 million as of April 19, 2023. The index yield is 4.75%, with the most recent dividend being $0.2044 (though the trailing 12-month distribution rate is just 3.67%).
With a median market cap of $4.75 billion, there is ample small and mid-cap exposure in addition to a handful of large caps being in the portfolio. On valuation, First Trust notes that the price-to-earnings ratio is low at 4.3 while the price-to-book multiple is just 1.6. What's more, FCG's weighted average price-to-cash flow ratio is very attractive at 2.9.
Digging into the allocation, data analysis from Morningstar shows that FCG leans toward the value style and has ample mid-cap exposure. Mid-caps are often overlooked and can feature long-term strength compared to their large-cap and small-cap peers.
FCG, specifically, offers investors a robust yield on the factor profile as well as high quality and strong momentum shares. With low valuation metrics and a high yield, there are reasons to like the ETF, but high exposure to one small niche of the market can be a risk.
FCG: Portfolio & Factor Profiles
FCG, despite holding a somewhat small portfolio of names, has decent diversification with no single stock representing more than 5% of the fund.
FCG: Top 10 Holdings
Seasonally, FCG tends to be strong into early June, according to data from Equity Clock . So, the next six weeks is prime time for the bulls. Once the summer solstice strikes, however, the bears shine. FCG has historically been a poor performer in its 15-year history from mid-June through the middle of August before the fund sloshes around through Q4.
FCG: Bullish Seasonal Trends Through Early June
The Technical Take
The 7-year view of FCG paints an interesting picture. Notice in the chart below that the ETF held key support in the $19 to $20 range on a pair of tests in the last year-plus. That spot was supported back in 2017 and 2018 while being modest resistance during the run-up in 2021. The fund notched a high a year ago on rising volume during the rally and has since fallen on declining volume.
In my technical view, that is a bullish sign so long as the pullback holds support - and it is doing so. The consolidation of the $31 peak has been orderly. I would like to see FCG get back above its now-falling long-term 200-day moving average. In all, long here with a stop under $19 is a favorable risk/reward play.
FCG: Bullish Consolidation, Shares Holding Support On Weaker Volume
The Bottom Line
Energy stocks - particularly those exposed to natural gas - have been hit hard in the 10 months. I see value in the space, though. With a low P/E, high yield, and reasonable risk/reward chart, I am a buy on FCG.
For further details see:
Eyeing Value Among High-Yield Energy Stocks: FCG A Buy