January 14, 2002; McDep Ratios Imply Appreciation Potential in Natural Gas

Because the royalty trusts have no debt, the McDep Ratio is simply the comparison of stock price to present value.  The message is that stock prices have dropped more than present value as indicated by declining McDep Ratio (see Chart). 

 A low McDep Ratio puts the investing odds in favor of the buyer.  The tendency is for the ratio to go back to one.  That could happen by present value declining further in which case the buyer hasn't lost much.  Or it could happen by the price going up in which case the buyer is well ahead.  In the next section we discuss an investment where a high McDep Ratio puts the investing odds in favor of the seller.