I’ll admit that, for a few weeks in January, I really dreaded going to work in the morning. As a Kinder Morgan Inc (KMI) shareholder, the bloodbath in pipeline stocks — and in KMI stock in particular — was enough to make me feel physically ill.
KMI stock bottomed out at $11.20 in January — 75% below its all-time high set in 2015. But since that low point, Kinder Morgan’s share price is up about 60% … and up about 21% year-to-date in 2016.
KMI stock is actually one of the best-performing large-cap stocks in America.
So, why the sudden change of heart for Mr. Market? And more importantly, is the Kinder Morgan comeback sustainable?
The change in sentiment was a product of several factors, all of which I consider sustainable. Barring another major correction that brings down the entire stock market, I believe the bottom is in for KMI stock.
Let’s take a look at some of those factors now.
The Top Reasons for Kinder Morgan’s Comeback
The Smart Money Joined the Fray: I consider this the single biggest factor. A lot of investors saw value in KMI stock, but they were scared to death to put any money into it due to the volatility. Few investors — and particularly fund managers that feared taking calls from panicked clients — wanted to be the first to jump in the pool. That was before David Tepper and Warren Buffett made a splash.
In mid-February, both Tepper’s Appaloosa Management and Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) announced major new positions in Kinder Morgan. This gave the sector the jolt it sorely needed. If Buffett and Tepper were buying it, it had to be safe — right? A lot of investors that had previously been too scared to move suddenly felt a lot better about it.
While this is now old news, I still consider it important. Not every stock Buffett or Tepper chooses is a winner (and it’s widely believed that KMI was bought by one of Buffett’s managers and not Buffett himself), but this particular buy broke the cycle of fear that had been crushing the stock.
The Crude Oil Recovery: Even though Kinder Morgan and its peers in the MLP space are mostly midstream operators that get paid based on volumes rather than on the price of energy, the entire sector has been slapped around by falling oil and gas prices. Kinder Morgan, like most of the larger players, also has some exposure to exploration and production.
And for the first time, investors actually started to worry about counter-party risk. If the oil and gas producers whose production KMI transports were to go belly up, that could potentially take a wrecking ball to the entire midstream model.
Well, the price of crude oil is up about 50% from its lows. It’s still far too low for comfort, but the rise has been enough to send the message that the sky isn’t falling. The price of a barrel of oil will continue to be volatile, but it’s not going to zero. And confidence in energy prices has translated to confidence in Kinder Morgan and other midstream operators.
Valuation: As a general rule, valuation is a poor market-timing tool. A cheap stock can stay cheap for a long time. But in the case of Kinder Morgan, the valuation reached the point of absurdity. The stock was trading for less than book value. And even after taking a 75% dividend cut, the stock still yielded 4.5% at the low. Eventually, cooler heads prevail and value investors work their magic. That’s what we saw over the past month and a half.
So, where does Kinder Morgan go from here?
My best guess is that the stock price spends a few weeks consolidating its gains and then makes another move higher. It may be a few years before we see a new all-time high in the share price. But a price in the $20-$25 range is very doable this year. Kinder Morgan is a solid company with an enviable collection of fee-collecting pipeline assets with cash flows that are close to bond-like.
In another 12 to 18 months, Kinder Morgan will probably start to raise its dividend again. And while I expect the new, more conservative KMI to raise its dividend at a more moderate pace going forward, I still expect its growth rate to beat the pants off of the average dividend stock.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas.
