Jim Simmons is the founder of Renaissance Technologies, a financial institution that uses mathematical formulas to direct investments. For that same reason, and because the criteria for purchases is not public, assessing its transaction is not straight forward. However, investments can be assessed through analyst opinions in order to get an idea of what the institution expects from a stock. For example, Technology Renaissance increased its holding in Energy Transfer (NYSE:ETP) during the last quarter of 2013. Most importantly, analysts have positively rated the stock on March 25th, thus confirming Renaissance Technologies’ investment, and offering prospect investors a good incentive to buy the stock. But, is today the right time to purchase the stock?
Renaissance Technologies Anticipates Analysts?
Analysts at Zacks reiterated a “Hold” rating for Energy Transfer, while Wells Fargo, Robert Baird, Goldman Sachs and Global Hunter Securities initiated coverage with a “Neutral” rating. On the other hand, Deutsche Bank, RBC Capital, Stifel Nicolaus, J.P. Morgan Chase, Bank of America and Imperial Capital upgraded the stock to “Buy” or “Outperform.” Last, only two institutions, Barclays and Oppenheimer downgraded to “Equal Weight” or “Market Perform.” Nonetheless, the positive remarks about the stock outweigh the negative ones as 6 institutions have upgraded its ratings.
- Warning! GuruFocus has detected 8 Warning Signs with ETP. Click here to check it out.
- ETP 15-Year Financial Data
- The intrinsic value of ETP
- Peter Lynch Chart of ETP
For 2013 Q4, Energy Transfer reported a great increment in revenues while net income declined slightly. The growth was pushed by an impressive improvement of the NGL Transportation and Services segment, while the Interstate Transportation and Storage performed the worst. Even though the quarter’s performance is below the same period the year before, it was not enough to offset full-year performance improvements.
Energy Transfer has absorbed market synergies generated by the shale gas and tight oil boom. As a midstream operator, the firm benefited from a bonanza in the recent years. The results of a positive economic environment reflected upon organic growth opportunities, and rapid growth midstream cash flow and distributions. However, growth does not last forever and the industry is suspected to have hit its peak.
As of today, Energy Transfer announced plans for investing on gas processing and natural gas liquids infrastructure, and new pipelines for tight oil and oil sands production. Hence, growth is expected to continue but at slower levels than the previous years. For the same reason, and after looking at Renaissance Technologies’ investing pattern, the recent purchase is an investment looking for short-term rewards, not an anticipation.
Have Analysts Missed Something, or Do They Reflect the Year Cycle Expectations?
Analysts have missed nothing, and their opinion is a reflection of what is expected by the firm in the short-term. Energy Transfer will surely perform at average or above, because that is what the cycle indicates. That is, the firm remains a premier MLP with strategically-positioned assets that serve major North American natural gas-producing basins, and the plan to construct a processing plant at Glasscock County is likely to help ETP expand its midstream operations in the Permian basin. However, it is hard to believe that such characteristics will deliver previous growth levels.
The fact that Energy Transfer is considerably more sensitive to commodity prices compared to other MLP subgroups, the difficulty to continue growing through acquisitions, rising operating expenses, and expected unfavorable regulation paint a gloomy future for the firm. Additionally, debt levels continue to rise while cash flow remains on the negative for the second year in a row. With such background beginning to configure, analysts’ opinions are correct in the short-term. And Renaissance Technologies’ investment is a cyclical short-term investment. Hence, it is not recommendable to take buy a large position in the firm for the long-term.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.