With the resurgence in energy prices, the best proxy for the group — Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) — has been on the move. While the ascent kicked off in August, it took Kinder Morgan Inc (NYSE:KMI) until mid-November to catch on. After bottoming out near $17, KMI stock is now a hair under $20.
After an almost-13% rally and with earnings on tap, what do we think of Kinder Morgan stock?
KMI is not the company it used to be. Now boasting a dividend yield of just 2.58%, it’s far below what long-time investors had once known. With the industry’s changes and company-specific events, though, management had little choice about slashing its payout.
It certainly didn’t make our list of top dividend stocks to buy.
Now, the worst seems to be over and the KMI stock price rally is proof. Still, I don’t want to buy right here.
Why? I’d much rather wait to hear what the company says about its most recent quarter. After a series of tough earnings and revenue misses in 2016, last year was better. I suspect Kinder’s fiscal fourth quarter was good, but I still want to hear what management expects for 2018 before dipping my toes in the water.
Trading KMI Stock
Waiting to buy Kinder Morgan stock is certainly the prudent move. Since its epic decline in late 2015, KMI stock has spent most of its time bouncing between $17 and $22. Now in the middle of that range, we have to be careful about what comes next.
When the chart becomes complicated, I like to make my observation simple. In this case, let’s only focus on two things: the range for KMI stock and the trend.
Click to Enlarge
On the bullish side, Kinder Morgan stock recently broke over its downtrend line (in green). This trend was a weight on KMI stock for all of 2017. In 2018 though — literally on the first trading day of the year — shares broke over this mark.
On a more neutral point, the shares are in the middle of its multi-year range. Worse, though, KMI stock now sports its highest relative strength index (blue circle) since July. At that point in time, shares were rejected at the downtrend line and promptly fell from $20 to $17.
So where does that leave us on KMI stock price? I want to see it fall to the low $18s and find support on the topside of its prior downtrend line. That would be a very bullish development and would give investors confidence that the big-picture trend is improving. Further — while it’s not noted on the chart — $18 has been decent support since June.
Should KMI stock pullback to and hold ~$18, it’s a buy. Not only will the dividend yield be closer to 3%, but the risk-reward will improve as well. I would target a run to the top of its range, near $22. That would represent a rally of roughly 22% from our pullback target.
The Bottom Line on KMI
We’re looking for a pullback of 7% to 10%. Of course, KMI’s earnings report will likely play a role in that. A negative response could spark the pullback we’re looking for. At the same time, a wildly optimistic conference call could ignite a rally from current levels.
As much as we hate to miss big rallies, I dislike big losses even more. I’d rather risk missing the opportunity of a big rally than take on the risk of a major pullback.
Earlier this month, analysts at Credit Suisse reiterated their outperform rating and $23 price target on KMI stock. While I don’t disagree with the stock’s potential, it could take some time to get there. KMI’s Gulf Coast Express Pipeline Project and other projects offer plenty of reasons to be optimistic heading into 2018 and beyond.
Before we get too excited though, let’s see how KMI stock price plays out.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
