Today we are adding a new ETF to the Tactical ETF Portfolio. I have been looking for opportunities in out-of-favor sectors in the commodity space. So far, energy seems to offer the best risk/reward which is why we have exposure to XOP which represents oil and gas producers. This new ETF, ENFR, represents energy infrastructure companies which own and operate things like pipelines and terminals.
ENFR doesn’t really have as much exposure to the underlying economy as XOP but clearly there is some relationship. For most of its history, ENFR has traded fairly in line with the utilities ETF, XLU, as both are really equity income plays but in 2019 ENFR started behaving more like an oil stock than a utility. This trend accelerated into the oil price crash earlier this year. Now, ENFR yields over 8% while XLU yields just over 3%.
The reason for the large disparity is simply the disdain investors have for the energy space as a whole. These stocks are not tech stocks and don’t qualify for inclusion in ESG funds, the only two types of funds seeing net inflows this year. If they are included in any funds at all it is the few value funds left standing. These, though, are generally experiencing net outflows which means that these stocks are constantly being sold, not for fundamental reasons but for sentiment reasons.
'By the end of 1980, 6 of the top 10 companies by market cap were energy related as was one third of the S&P 500. Things today could not be more different. By the end of March, the energy component of the S&P 500 hit 2.8% — by far the lowest on record.' https://t.co/fSLOu06WTs pic.twitter.com/Gk17Yt1jLY
— Jesse Felder (@jessefelder) August 5, 2020
At the same time, insiders here are going gaga for their own shares. As Jason Goepfert noted on twitter recently, the insider buy-to-sell ratio in the energy space is off the chart right now. Some of this is centered on the oil and gas producers. Much of it is also focused on these infrastructure companies.
The insider buy/sell ratio in energy stocks is 👀 pic.twitter.com/1OiV1z0fJ0
— SentimenTrader (@sentimentrader) August 17, 2020
Insider buying has been especially pronounced at three of the ETFs top 10 holdings. These are Enterprise Product Partners (EPD), Kinder Morgan (KMI) and Energy Transfer (ET). All three of these companies are pipeline operators. At EPD, three executives have purchased nearly $1.5 million worth of stock since the start of the year. At KMI, two insiders (primarily Executive Chairman, Richard Kinder) have purchased over $35 million. And at ET, four insiders (led by CEO, Kelcy Warren) have purchased over $92 million in stock in 2020 alone. It seems all of these energy executives have a far different opinion of the their shares than that represented by the Wall Street consensus.
ENFR has rallied nicely off of its lows put in back in March but remains well off its $17-21 range from the past few years. Technically, it is still in a downtrend but looks to have good support in the $12-13 range.
In all, this looks looks like another attractive opportunity to take advantage of the widespread hatred for anything commodity or energy related. It may make sense to put on a starter position here and look to add on any weakness. A test of that $12-13 area might make for a nice spot to do so.