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Our Shocking Call On Oil Is Already Up 25%

As Executive Editor of StreetAuthority, I get to have a front-row seat to the analysis made by some of the brightest financial minds in the country.

After doing this for many years, it usually takes a lot for something to really stand out and grab my attention. That's why when I noticed that one of our most conservative analysts recently make a big, bold contrarian call involving the energy sector and a stock currently yielding 17%, I took notice.

If he's right, it could easily become one of the most profitable calls any of our analysts make this year -- including myself.

Let me explain...

any of you are probably familiar with Nathan Slaughter. As Chief Investment Strategist of our premium newsletter, Total Yield , Nathan is all about two things: dividends and buybacks.

It's this quest to find investments that deliver shareholder value that normally lead him to be one of our most conservative analysts. In fact, Nathan has warned his subscribers in the past about chasing after high yields that may seem too good to be true. After all, what good is a stock that yields double digits if the share price declines by, say, 20% or more?

But every once in a while, Nathan will lay it all out on the table and make a move that catches everyone off guard. This latest one has to do with a master limited partnership that currently yields a staggering 17%.

You read that right.

As I said, Nathan usually stays away from these kinds of outrageous yields. So I was curious to see what his thinking was when he added this stock to his portfolio.

The company in question is Vanguard Natural Resources (NYSE: VNR ) , a master limited partnership that not only owns pipelines that transport crude oil and natural gas, but also drills for it.

Normally, this kind of endeavor would sound pretty risky. After all, MLPs appeal to investors for their safe, reliable income streams that aren't tethered to volatile energy prices. And with oil prices nose-diving over the past few months, it would be right to assume that anything energy related has probably taken a hit.

But as Nathan puts it, "Vanguard's strategy is simple: buy mature, proven oil-bearing properties, milk them for all they're worth, and then convert the daily production to a stable cash flow stream through the use of hedges. These contracts mute price swings (both upside and downside), providing a predictable stream of income."

Now, there are a few important things to remember about this company.

First, about 70% of production actually comes from natural gas. Normally, that would be something of a lost opportunity when oil prices are high, but in this environment it's a nice thing to have.

Second, as Nathan points out, the company hedges its production in the futures market. Currently, about 70% of oil production is hedged at $91.95 per barrel (after nose-diving, benchmark WTI crude has recently rebounded to about $50 per barrel), while 80% of gas production is hedged at about $4.32 (the current spot price is around $2.67). So regardless of where energy prices are at, most of the company's incoming cash flow is protected against volatile energy prices.

That hasn't stopped shares of Vanguard from being punished along with the rest of the energy sector. The stock fell from a high of more than $30 in July to about $13 when he first wrote about it in Total Yield . And up until just recently, the stock was selling for less than book value, meaning the market was discounting the value of the company's assets and valuing its ability to generate earnings for basically nothing.

Another result of this pummeling: Vanguard's yield skyrocketed up to 18%.

Now, high yields like this normally don't last for long. One of two things usually happen -- either investors notice a climbing yield and buy shares (driving the yield back down), or the company cuts its dividend. The market seems to be pricing in the latter.

But even if a dividend cut does happen, shareholders will likely still be earning an outsized yield. Let's say the dividend is cut in half -- back to historical levels -- that still equates to a yield of nearly 9%.

So far, things are working out . After bottoming out at around $12.50, Nathan added the stock to his Total Yield portfolio on January 22 -- at about $13.52. Vanguard has since been in an uptrend and now trades at about $17.02 -- a 25% gain in less than 10 days.

Time will tell if Nathan is right in the end, but even if the company cuts its dividend, Nathan and his subscribers could still be sitting on a massive dividend yield, along with a nice capital gain if oil prices rebound.

A 25% gain in 10 days is downright impressive. Investors looking to make a contrarian bet on energy would do well to consider Vanguard. If you'd like to learn more about about the Total Yield strategy and some of Nathan's picks, follow this link.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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