Best Stocks Recap: Energy Transfer Equity LP (ETE) Stock Still a Pipeline of Profits

A habit of prioritizing good, but contrarian, picks like ETE stock has paid off

By Charles Sizemore, Principal of Sizemore Capital

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It’s bad form to gloat. Apart from making you insufferable to be around at parties, you’re tempting fate … and inviting a reversal of fortune.

Best Stocks Recap: Energy Transfer Equity LP (ETE) Stock Still a Pipeline of ProfitsThat said, I’m going to risk it and toot my own horn here for a moment. I’ve had a good string of successes in InvestorPlace’s annual Best Stocks contest. I took the top prize in 2011, the very first year of the contest, when my pick — credit card behemoth Visa Inc (NYSE:V) — racked up a 34% return.

I followed that up in 2012 with a strong performance by Turkish mobile operator Turkcell Iletisim Hizmetleri A.S. (ADR) (NYSE:TKC), just barely missing the top slot with a 37% return. And I reclaimed my crown in 2013 when German luxury automaker Daimler AG (OTCMKTS:DDAIF) rolled to victory with a 65% return.

Alas, you can’t win them all. My 2014 pick, South African mobile operator MTN Group Ltd (ADR) (OTCMKTS:MTNOY) finished in last place, losing 6%. And my 2015 pick, business development company Prospect Capital Corporation (NASDAQ:PSEC) finished in the middle of the pack, losing a modest 4%.

Well, in 2016, I got my groove back, winning InvestorPlace’s Best Stock for 2016 contest with a 55% return in Energy Transfer Equity LP (NYSE:ETE). Over the six years of the contest, my picks have returned an average of 30%. Not too shabby. Taking the top spot in 3 out of 6 years and coming in a close second in a fourth… I’ll take that!

In 2017, I chose General Motors Company (NYSE:GM), which is thus far off to a respectable start (see General Motors Will Roll to Victory). May the best stock win!

I’m the first to admit that there is a lot of luck involved with winning a contest like this. Holding a single stock for exactly one calendar year is not how investors invest in the real world. And had the contests started on some other arbitrary date — say, Jan. 31 as opposed to Dec. 31 — then the returns across the board would look a lot different. So luck was definitely on my side with respect to the exact timing.

Yet all of my picks did have one thing in common: All were contrarian plays that no one else wanted at the time.

Let’s take Energy Transfer Equity as an example. Right now, shares are riding high on optimism that the incoming Donald Trump administration will be friendlier to pipeline operators. The Barack Obama administration has been openly hostile, with their halting of ETE’s Dakota Access Pipeline being a prime example. The change in the White House has investors looking at this entire sector in a more positive light.

But think back to this time last year. The prices of oil and gas were crashing, and rival pipeline operator Kinder Morgan Inc (NYSE:KMI) had just cut its dividend, leaving investors to wonder who might be next to slash their payout. ETE’s sister companies weren’t looking especially healthy, and Energy Transfer Equity was embroiled in a controversial takeover bid of Williams Companies Inc (NYSE:WMB). Before the selloff was finished, ETE would drop by just shy of 90%.

While terrifying, these are the moments that value investors live for. If you do your homework, you can have confidence that your pick will come out of the selloff in one piece.

Let’s consider ETE for a moment. Given the turbulence in the credit market that was making it hard for the company to raise capital, I knew there was a good chance it might have to slash its distribution or, at a minimum, stop growing it at the blistering 30% annual rate that we’d become accustomed to seeing. But I also knew that ETE’s empire had real, tangible assets in its pipeline network that would put a floor under the stock price and ensure its survival as a company.

I also knew that Dallas billionaire Kelcy Warren — the founder and CEO of Energy Transfer — had a substantial part of his entire fortune tied up in ETE stock, so the person running the company had every incentive to do whatever it took to make it survive. Mr. Warren had a lot more at risk than I did.

Obviously, none of this guaranteed I would win the Best Stocks contest, but it definitely put me in position to do well. And when crude oil prices found a bottom and the credit markets settled down, ETE started its epic run.

I’m still long Energy Transfer Equity, and I expect it to rise another 50% to 100% over the next two to three years. But let’s now take a quick look at General Motors, my pick for the Best Stocks for 2017.

General Motors is not in the midst of an industry-wide meltdown like Energy Transfer Equity was a year ago. But I can credibly say that GM, like ETE, is a cheap stock that no one wanted. As I’m writing this, General Motors trades for an almost ridiculous 6 times earnings and 0.34 times sales. It seems that the market expects GM’s sales to massively slow down in the years ahead. And to be fair, with ride sharing services like Uber and the promise of driverless cars on the horizon, handicapping GM’s future prospects is a challenge.

But at current prices, a lot of bad news is already priced in. GM doesn’t have to have record year of auto sales in order for the stock to do well. It simply needs to avoid blowing up, and I consider that a safe bet.

Will that be enough to push GM into the top spot in 2017? Only time will tell, but I like my chances.

Charles Sizemore is the principal of Sizemore Capital Management, an investments firm based in Dallas, Texas. As of this writing, he was long GM, ETE and KMI stock.

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