San Juan Basin Royalty Trust is a Smart Choice

 You can still get in our second recommendation of last week.  We have been biding our time all year to pick the moment to recommend the stock again.  The trigger was a McDep Ratio falling below 0.8 (see Chart). 

Although we have been analyzing the properties that became SJT since 1975, only in the past two years have we been doing a weekly calculation that compares present value of future cash flow to stock price.  Since the trust has no debt, that ratio is the same as the McDep Ratio.  When the McDep Ratio was below 0.8 in the past two years, the stock subsequently outperformed. 

We think it is smart to buy a high quality, unique asset like SJT now, but will we also be lucky?  We acknowledge we could be early as there are some low payouts likely in the months ahead.  The smart answer is that what is known is in the stock.  Yet we recognize that sometimes the market is inefficient and stocks still go down when known information is publicized.   

The next few months' distributions are the main topic of conversation on the Yahoo message board for SJT.  One casual estimate is that the October distribution will be $0.06 and November, $0.02.  Another estimate that apparently takes into account daily San Juan Basin natural gas prices is that October will be $0.10 and November, $0.054.    

Not wishing to overemphasize monthly numbers, we estimate a distribution of $0.14 for the next three months.  Our real distribution focus is on the next twelve months for which our projection is now $0.84 per unit, down from $0.90 last week.  We think the important question is not what the distribution will be in the next few months, but what will futures prices at any time imply for distributions further out.  Even then we will want to make our own judgment as to whether the markets make sense. 

 Our judgment is that SJT is attractive for new commitments now.  Save some buying power in case short-term developments have a temporary negative impact.