There is a bright future for natural gas stocks

After an epic, pandemic-induced crash in 2020, the US stock market has returned to winning ways and is experiencing another record season this year. The S&P 500 has already gained 16.0% in the year to date and is constantly marking new all-time highs. However, few sectors of the market have outperformed the long-plagued energy sector. After years of underperformance, the energy sector has been a standout performer this year with the Energy Select Sector SPDR ETF (NYSEARCA: XLE) up 30.0% this year, only outperformed by the 49.8% increase this year of the SPDR S&P Retail ETF (NYSEARCA: XRT) from the retail sector. The Delta variant of Covid-19 has cast a dark shadow over the entire market. However, analysts say the recent wave of infections is not yet translating into a decline in spending as most consumer metrics such as air travel, dining out and box office are still in positive territory. After a period of increased volatility due to an OPEC + dispute over production volumes, the energy sector is recovering, with Wall Street largely bullish on the medium-term outlook. The oil sector has been in the spotlight lately after last year's crash sent oil prices into negative territory. The natural gas sector was even more impressive, however, with the best-known natural gas benchmark, the United States Natural Gas ETF, LP (NYSEARCA: UNG) up 48.6% year over year thanks to an ongoing natural gas rally. Natural gas futures were trading at $ 3.95 / MMBtu on Thursday, making them well on the way for the fourth straight month in robust gains. Natural gas is up 63.4% since the start of the year and 135.7% for a year, with prices back at the December 2018 levels when gas last traded above $ 4. If you look closely at these numbers, you'll find that natural gas stocks are lagging the commodity they are tracking nearly 15 percentage points so far this year and a whopping 95 percentage points over the past 12 months. This apparent anomaly stems from the fact that natural gas stocks trade based on the price of longer-term futures. While short-term futures tend to fluctuate due to short-term dynamics such as weather, equity investors are more concerned about what the market might look like in 18 months or more. As a result, many natural gas stocks could be undervalued right now.