So you want to buy a stock that will deliver 10 times your investment – but buying into a speculative situation almost always produces a conundrum…

Investing too early often means that you’ve just signed up for a lot of risk, volatility and sleepless nights. But investing late almost always means that you’re paying too much, leaving profits on the table.

Well, allow me to give you some advice.

[ad#Google Adsense 336×280-IA]When it comes to resource stocks, you’ve got to analyze whether you’re hunting for elephants or deer.

Elephants are the mega plays, the kind that can produce 10-1 or 100-1 returns.

Back in the 90s, this type of return was commonplace in the natural resource sector, with micro-cap gold, silver and nickel plays sometimes producing 1,000-to-1 returns.

There was risk, sure, but the returns justified the risk.

Today, that type of return can still be had.

It’s not going to come from gold, silver, or nickel, though. Those sectors are out of favor and probably will be for a while. This isn’t to say there aren’t any opportunities in those sectors, just that they tend to be of the smaller “deer” variety right now.

If you’re looking for the elephant-sized returns, you need to turn your attention to the oil and gas sector – and not to the established plays, or even the smaller drillers. Your attention needs to be focused squarely on the explorers and prospectors. I particularly mean companies that are actively prospecting in areas that are known to have prolific reserves.

They also have to be relatively isolated. That is, there’s no point going elephant hunting in places like the Bakken, because while reserves there are plentiful, they’re under the control of many companies and spread far and wide. What you should be looking for is a play like the North Slope, where reserves could be massive and under the control of a handful of companies.

And you need patience. Lots of it.

What I’ve learned is that these companies that are prospecting for huge returns can take a while to actually deliver on them. For example, the companies I visited in Alaska last week are sitting on potentially massive reserves, yet the first drop of oil may not reach the market until 2017 – nearly four years from now.

Many investors tune out at this point, but they’re the ones missing the boat.

Here’s the thing: It’s not when the oil will reach the market that matters. What matters are the test results that show how much oil is technically recoverable and the likelihood of those reserves being exploited.

You hear about massive reserves all the time, but not every major discovery is worth acting on. British Columbia, for example, is sitting on trillions of cubic feet of natural gas.
But there’s absolutely no infrastructure in the places that have the most prolific reserves.
As a result, those reserves will likely never be tapped because the cost of bringing them to market is greater than the price of the commodity.

The time to invest in a speculative prospect is always before the results are announced, you pay your money and you take your chances. As a speculative investment, you’re not looking for a double-digit return, but a triple- or quadruple-digit return. The key is to make that speculative gamble on a company that’s drilling in an area with proven reserves and minimal competition.

When prospectors report their results, the share prices will either head to the moon or crash. That’s just a fact of the market.

And often, you’re banking on a takeover.

You see, in the oil business, small-cap publicly traded companies with huge finds tend to be scooped up quickly by larger players with deeper pockets. It’s rare that a small-cap play will turn into the next Exxon Mobil (XOM) or Conoco (COP). It takes many millions, or even billions, of dollars to develop an elephant-sized find, and that kind of capital only sits on the balance sheets of the majors.

Bottom line: The recent market selloff has provided ample opportunity to look at micro-cap and small-cap gems. But in doing so, you need to find a small company in a prolific field with few competitors. And most of all, you need to be patient.

And “the chase” continues,

Karim Rahemtulla

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Source: Oil and Energy Daily