foxex: Energetic Response

Chart Advisor | Focus on the Price

Thursday, February 20, 2020

1. Stocks dip, rebound as Coronavirus fears fade

2. Why Kinder Morgan shares are rising

3. When ESG benefits the lesser of evils

Market Moves

Stocks dipped precipitously during the morning hours of the trading session as both the Nasdaq 100 index (NDX) and the S&P 500 index (SPX) fell more than 1.5 percent on Coronavirus news released by the World Health Organization. However, by the mid point in the session bullish investors had started buying. The action brought the indexes to manage better than a fifty-percent retracement intraday.

One curious point of the day's activity is that the energy sector didn't get trounced by the news. In fact, State Street's Energy Sector index ETF (XLE) outperformed all broad market indexes on the day. That's an important observation chart watchers can appreciate, since this sector has appeared to drop significantly on every prominent Coronavirus headline—at least until now.

With that in mind, it may be time for investors to have a look at energy sector stocks. Consider the chart below which features one particular stock represented in the top 10 holdings of XLE, Kinder Morgan (KMI). Surprisingly, this stock has actually kept pace with the S&P 500 so far this year.

Why Kinder Morgan Shares are Rising

Consider the top five holdings of the most heavily-traded energy sector ETF (XLE), as shown in the chart below. This sector had two serious strikes against it during the last half of 2019. The first was the falling price of oil, but the second was the growing influence of ESG investing mandates being implemented in various pension funds and endowments.

There is evidence that this factor has taken on an elevated level of consideration within investment teams. This has led some to shy away from carbon-heavy investments such as traditional oil companies. Even if the companies are good investments, selecting such companies for investment may expose the fund to "reputation risk." Despite these formidable headwinds for a stock like KMI, it is leading the others. The reasons are worth considering.

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When ESG Benefits the Lesser of Evils

Kinder Morgan owns a tremendous network of pipelines from the Permian basin in Western Texas to various population centers in Texas, Oklahoma and Kansas. These pipes carry billions of cubic feet of Natural Gas. The significance of this is that though these pipeline projects may have some environmental impact on wildlife and terrain, the impact is a trade-off with the reduced air-pollution from flaring (the practice of burning natural gas by-products during the refining of shale-oil).

Natural gas, while still a fossil fuel, burns much cleaner than oil or coal, and produces much more energy than other available alternatives. As a result, despite the company's categorization in an arena considered less environmentally friendly, it is in the enviable sweet spot of being the best of the worst.

The share price tends to reflect this as the chart below demonstrates. A recent broadening formation in the price action suggests that the stock may be displaying a bullish turn in its rate of change, which could support the continuation of a trend to higher prices.

The Bottom Line

Stocks dipped sharply today on news from the World Health Organization, but investors jumped in and price rebounded strongly. Surprisingly, energy stocks didn't participate in the deep intraday selling, and rebounded to break even. Among such stocks, Kinder Morgan Incorporated shows surprising resilience.