Spectra Energy: An undervalued natural gas play

Posted Dec 8th 2009 2:20PM by Joseph Lazzaro
Filed under: Stocks to Buy

Mid-stream natural gas company Spectra Energy Corp (SE) has treaded-water since the September 28, 2009 Buy recommendation at $19.19, but I'm nevertheless Reiterating my Buy call. Here's why:

While some institutional investors have exited Spectra's shares recently on short-term profit-taking at year-end, the period of soft natural gas prices appears to be ending, hence the argument that the minor SE's pull-back is a good time to establish a position or add to shares remains valid.

Further, assuming that both natural gas use and prices resume a more-constant uptrend as the U.S. economic recovery takes hold, SE will trade at a much higher multiple than the current P/E of 14. A $30 stock price by the end of 2010 is very attainable. The First Call FY2009/FY2010 EPS estimates for SE are $1.16 to $1.44.

Technically, as noted, Spectra's stock has meandered after breaking through $20 resistance earlier this fall. Still, given SE's impressive run-up in 2009, view the minor pull-back as a buy opportunity. Further, so far, Spectra's stock has remained above the key, 50-day moving average -- another sign that the stock price dip is a correction.

Stock Analysis: Spectra Energy Corp is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 50% position in SE now; then buy another 25% in one month, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your SE position before February 2010. Sell/Stop Loss if you were to buy shares in this company: $8.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: SE