We’ve been highlighting the relative strength of certain Gas names in the Energy space since August, and they’ve worked wonders on the long side.
Although we’ve issued several tactical updates since then (December and January), I wanted to use today as an opportunity to revisit this thesis and update our approach given many of our price objectives have been hit.
Here’s Indraprastha Gas, which is a great example of the type of setup we’re dealing with in the Energy space (at least in terms of names we like on the long side).
Prices have had a great run over the last 3-6 months and are now stalling at our price objective as momentum diverges. To us, this signals that some profit-taking is occurring and that further consolidation in the stock could be needed before prices ultimately continue their long-term trend higher.
Click on chart to enlarge view.
As long as prices are below that 536 level, there is too much downside risk and opportunity cost in being long the stock. With that said, if prices get firmly above that level then we know the overhead supply has been absorbed and buyers are ready to take it higher. For now, neutral is best but any eventual breakout above 536 would target 731.
Here’s Gujarat Gas Ltd. in the same position. As long as prices are below 312, there’s nothing to do. But above that level, we can be long with a target near 430.
Gujarat State Petroleum has not worked as well and is showing relative weakness, correcting through price rather than time. With that said, if rotation does come back into this space it should benefit and therefore weakness towards 225 can be bought with a 275 target. Below 225 though, all bets are off and we move on.
Other Energy names that continue to show strength as well are Adani Green Energy Ltd., Adani Transmission, and Mahanagar Gas Ltd.
Here’s Adani Green Energy Ltd. consolidating through time below 215. Similar to the stocks above, if we’re below that level then there’s nothing to do, but above it we can be long with a target near 330.
Adani Transmission has gone through a beautiful, tight consolidation through time as it works through the supply that’s preventing it from breaking through 357. If/when prices do eventually break out, we want to be long with a target near 467.
Last, but not least, is Mahanagar Gas Ltd., which still has some work to do but is worth keeping on our radar. A break above 1,290-1,300 would confirm the continuation of its long-term trend higher and target 1,610. Keep an eye on this one.
Overall, these Energy names may have pumped the breaks in the near-term, but they still look great on an absolute and relative basis for our intermediate/long-term timeframe. If we start to see a rotation back into Energy then I’d expect these names to break out to new highs in tandem.
While we do expect some more consolidation before prices break out, if we start to see rotation back into Energy then we’d expect these names to all break out in tandem. When a group of stocks has moved this aggressively and continues to act well, it tells us there is institutional support behind them and future breakouts should be respected and bought, not second-guessed or shorted.
And in the event we are wrong, our risk is very well-defined so we’ll cut our losses and move on. But in our opinion, that’s the lower-probability outcome should these stocks get above the levels outlined above.
Thanks for reading and let us know if you have any questions!