New Trade for December 8th, 2020

Stocks are weak in pre-market trading this morning.  Worries over stalled stimulus talks and spiking Covid cases fueled a 148 point loss for the Dow in the previous session.  Where are we headed today?  Only time will tell.

Our trade for today highlights an energy play that seems primed for gains in 2021.  

Energy Transfer LP Unit (ET) is a leading midstream company in North America that provides a large amount of the pipeline infrastructure necessary for the movement of crude oil and natural gas from the producing regions to refineries.  The assets it owns will be needed, no matter what and replacing these assets is almost impossible for potential new market entrants.  ET proves essential as the US aims for its goal of energy independence.  In fact, it is necessary that midstream companies build out their infrastructure further going forward. One forecast sees a need for $500+ billion of additional midstream investments over the coming 15 years pointing to strong potential gains in the years to come.  

Energy Transfer also recently announced that it will make its first move into renewable energy through the purchase of 28 MWac of solar power.  Some analysts expect that the move will drive long-term shareholder rewards and strong double-digit returns.

Energy Transfer sports a 9.10% yield, one of the highest in its group.  Ongoing yield spread normalization could result in share price upside for Energy Transfer relative to its peers.

The company’s enterprise value is roughly $65 billion, which, by size, makes ET one of the largest midstream companies.  However, the company has seen a 50% loss, or $22.5 billion, since the start of 2020.  ET stock is currently trading at around $6.70 per share, with a trailing twelve month P/E ratio of just 7.   

Factor in share price gains in the long run, due to deleveraging that will allow for cash flow growth (lower interest payments) and due to growth from new projects and rate increases.  Now may be an opportune time to buy for income-focused investors.  Of 13 analysts covering the stock 8 rate it a Strong Buy, 1 Moderate Buy,  4 Hold and no Sell ratings.