We recently compiled a list of the 10 Best Affordable Stocks Under $40 According to Short Sellers. In this article, we are going to take a look at where Energy Transfer LP (NYSE:ET) stands against the other affordable stocks under $40.
Several traders tend to profit from stocks through appreciation. However, some do the opposite– their idea is to profit from stocks when their value declines. This happens through a strategy known as short selling. In simple words, short selling means borrowing a security whose price is expected to fall and then selling it in an open market. Later, the trader buys that same stock back, hopefully at a lower price than initially sold for. The trader then returns the borrowed stock to the broker and pockets the difference.
Short interest serves as a barometer of investor sentiment towards a stock, sector, or market. Short interest represents the number of shares that have been sold short and are still outstanding. Since short sellers tend to benefit from the decline in the stock price, rising short interest generally signals higher negative investor sentiment. On the other hand, declining short interest means investors are becoming less bearish.
Short Sellers Made Fortunes Despite S&P 500 Touching Record Highs
Bloomberg reported that short sellers saw a strong 2Q 2024, despite the broader market touching record highs.
Over the past 6 months, the S&P 500 saw an increase of over ~11%. How did the short sellers make money in this environment? Short sellers amassed about $10 billion in paper profits during 2Q 2024.
The paper earnings from sectors like industrials, health care, and financials were able to offset the $15.7 billion mark-to-market losses experienced in technology.
This means that investors continue to flock to just a few mega-cap technology stocks amid a challenging macroeconomic backdrop. Therefore, there were some areas of weakness in other sectors. During the quarter ended 28 June, the tech-heavy Nasdaq 100 Index saw an increase of over ~7%. Meanwhile, the energy sector witnessed the most short covering during 2Q 2024.
Short Sellers Saw Record Weekly Profits Due to Broad-Based Tech Decline
While the short sellers saw losses in 2Q 2024 as a result of broad-based buying in the technology stocks, the group was able to pocket some gains in early April 2024. Reuters reported that traders who bet against the “Mag 7” group of the US technology stocks were able to book their biggest-ever weekly profit of over $10 billion in mid-April. During that time, the tech-heavy Nasdaq Composite Index and S&P 500 saw 6 straight sessions of declines as there was high inflation and evidence of resilience in the US economy. As a result, the rate cut hopes were hampered, benefiting the group of short sellers.
As per LSEG (London Stock Exchange Group plc) data, overall, Big Tech shed ~$1 trillion in their market cap.
Short Bets Have Now Declined, Large Bank Says
JPMorgan believes that consecutive highs in the broader US stock market turned short selling into a difficult trade. Therefore, the bets against the US indexes have now tumbled. The declining short interest continues to provide steady support to the US equities, helping to suppress volatility. Experts opine that there are 3 critical factors, because of which it was difficult to bet against the market situation.
Firstly, the short bets are expensive to maintain if the stock starts climbing, a risk that holds significance in today’s bull run. The excitement around artificial intelligence (Al), the potential for rate cuts, and the state of the broader economy have all been factored in. Secondly, analysts believe that regulators have added restrictions to short selling, as they have mandated transparency and added costs to short sellers that target equities. Finally, the industry players continue to back out as they face a rising wall of participating retail investors.
Our methodology
To compile the list of 10 Best Affordable Stocks Under $40 according to short sellers, we used the Finviz screener and shortlisted the stocks with prices less than $40. Then, we selected the stocks that have a forward P/E multiple of less than ~22.40x (since the broader market trades at a forward P/E of ~22.40x). Finally, we picked stocks that were the most popular among hedge funds and had low short interest. The stocks are ranked in descending order of their short interest.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An aerial view of an oil rig at sunrise, emphasizing the power of the natural gas transportation industry.
Energy Transfer LP (NYSE:ET)
Forward P/E Ratio as of 26 August: 10.27x
Share Price as of 26 August: $16.11
Number of Hedge Fund Holders: 32
Short % of Shares Outstanding (31 July 2024): 1.03%
Energy Transfer LP (NYSE:ET) owns a large platform of crude oil, natural gas, and natural gas liquid assets primarily in Texas and the US mid-continent region. The company has gathering and processing facilities, one of the largest fractionation facilities in the U.S., and fuel distribution.
The company is involved in all the aspects of midstream sector. It transports, stores, and processes various hydrocarbons throughout its systems. Therefore, the size and breadth of the systems provide several expansion project opportunities.
Energy Transfer LP (NYSE:ET) plans to capitalize on the early opportunities that it is seeing in power generation because of increased power needs from data centers due to the rise in artificial intelligence (AI). The company now expects its 2024 growth capital expenditures to be ~$3.1 billion. It benefits from a portfolio of assets having exceptional product and geographic diversity.
Energy Transfer LP (NYSE:ET) seems to be well-positioned to capitalize on the increasing natural gas power demand. Considering this growth opportunity, together with its strengthened balance sheet and consistent distribution growth, Energy Transfer LP (NYSE:ET) should see strong and stable growth over the upcoming years. Its well-diversified portfolio and solid execution track record should act as tailwinds. Dallas has been emerging as the key data center hub. Therefore, the company is likely to benefit from perhaps ~8 billion cubic feet per day of new data center demand, which is expected to take place by 2030.
Analysts at UBS Group increased their price target on shares of Energy Transfer LP (NYSE:ET) from $23.00 to $24.00, giving a “Buy” rating on 15th May. According to the Insider Monkey database, the number of hedge funds holding stakes in Energy Transfer LP (NYSE:ET) stood at 32 at the end of 2Q 2024.
Silver Beech Capital, a value-oriented investment management firm, released its 4Q 2023 investor letter. Here is what the fund said:
Energy Transfer LP (NYSE:ET) owns and operates the largest and most balanced collection of energy infrastructure assets in the United States. ET’s assets include 125,000 miles of oil and natural gas pipelines, export facilities on both the Gulf Coast and East Coast, and more than 1 million barrels per day of natural gas liquid fractionation capacity. ET accounts for 20% of worldwide natural gas liquid exports. Further, ET is uniquely connected to every major hydrocarbon basin in the United States.
By assembling energy infrastructure to gather, process, transport, and store hydrocarbons, ET connects exploration and production companies (“E&Ps”) with downstream end users such as gas stations, utilities, and export facilities. As an end-to-end midstream solution, ET enables its customers to focus on their portion of the value chain without the burden of significant but essential midstream logistics. ET’s services thus add tremendous value to all constituents of the energy marketplace.
Though natural gas is a relatively clean source of fuel, restrictive federal and state regulations and other permissions severely restrict the building of natural gas pipelines and other infrastructure in North America that would help facilitate abundant hydrocarbon production. Pipelines are by far the cheapest and greenest method of transporting hydrocarbons; pipelines reduce emissions from truck transport and reduce congestion on highways, rail, and shipping routes…” (Click here to read the full text)
Overall ET ranks 6th on our list of the best affordable stocks under $40 according to short sellers. While we acknowledge the potential of ET as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than ET but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’
Disclosure: None. This article is originally published at Insider Monkey.