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Don’t Blindly Follow Robinhood Traders into Energy Transfer Stock

Josh Enomoto
·5 mins read

Going through the list of the 100 most-popular Robinhood stocks, I came across midstream giant Energy Transfer (NYSE:ET). Typically a great “safety” net in a bull market thanks to its generous passive income opportunity, ET stock doesn’t perform well during downturns. That fact should keep most conservative investors on the sidelines. However, this sentiment doesn’t apply for Robinhood traders.

A magnifying glass zooms in on the Energy Transfer (ET) website.
A magnifying glass zooms in on the Energy Transfer (ET) website.

Source: Casimiro PT / Shutterstock.com

Frankly, it’s not hard to see why many young or inexperienced investors have turned to ET stock. First, there’s the adage of “buy low, sell high” that has been misinterpreted to mean buying anything at a discount. As most experienced traders know, sometimes, there’s a reason why shares are priced in the doldrums.

Second and perhaps more convincingly, the dividend yield for ET stock has become very generous indeed, at least on paper. Earlier this month, the yield was at an incredible 18%. At time of writing, it’s at a whopping 20.1%. Because Energy Transfer is a renowned name in the energy space, I believe many investors are buying on the assumption that the yield is sustainable.

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ET Stock Leaves a Tax Surprise

Now, this is the new normal. So anything is possible, I suppose. Far be it for me to say otherwise. Still, the Robinhood traders that buy into ET stock will be left with one nasty surprise. As a master limited partnership, Energy Transfer does not have to pay corporate taxes on profits like any other partnership. That could yield favorable tax treatment for investors.

However, investors must submit a K-1 form for every MLP they own. This is a convoluted form that may require an accountant to properly manage. And that could erase whatever tax benefit there is from owning Energy Transfer.

Economy is Biggest Concern

Of course, everyone is different. Some might enjoy the paperwork associated with filing K-1 forms. As for me, I like to keep my life as simple as possible. And given the nature of the Robinhood platform — an easy, intuitive app geared for the investing novice — I’ve got a feeling that most users will share the same sentiment.

In other words, if you’re buying stocks on Robinhood, you want the money without much fuss. If so, ET stock isn’t the most appropriate vehicle.

But set aside the nuances of MLPs. Overwhelmingly, the case against Energy Transfer doesn’t really have anything to do with the business. Rather, the economic outlook for any energy-related organization is simply poor.

For instance, the August jobs report provided superficially encouraging figures. Total nonfarm payroll employment rose by 1.4 million, according to the U.S. Bureau of Labor Statistics. As well, the national unemployment level fell to 8.4%. Given these trends, we could see unemployment drop below 5% over the next several months, lending credibility to the V-shaped recovery theory.

Except that there’s one glaring problem: permanent job losses continue to tick higher.

ET stock vs. Permanent job losses
ET stock vs. Permanent job losses


Click to Enlarge
Source: Chart by Josh Enomoto

Last month, Politico reported that permanent job losses, while only representing a fraction of the total jobs lost during this pandemic, has begun filtering out to higher-paying job sectors that were initially unaffected by the shutdowns. At the time of the report, permanent job losses were just under 2.9 million. Recently, the level has jumped to 3.4 million.

Interestingly, the monthly average price of ET stock and the permanent job loss trend this year share a correlation coefficient of negative 49%. But since April, the coefficient is a negative 94.6%. Essentially, as permanent job losses increase, ET has been falling lower.

Direct Fundamentals are Negative

If the economy wasn’t enough of a concern, the direct fundamentals for ET stock don’t provide much confidence. For instance, natural gas prices have been moving steadily lower over the years. And while there was a huge spike in value last month, prices appear to be coming back down to earth.

I’m afraid it’s the same scenario with crude oil. Yes, automotive traffic has improved throughout the country (and the rest of the world). As well, airline travel is picking back up. But the demand inflows isn’t enough to support oil prices, which have retreated this month.

As I mentioned above, with permanent job losses mounting, along with Americans continuing to file for jobless claims in the hundreds of thousands, demand for energy will be pressured. No one can be sure when that demand will return, presenting deep challenges for Energy Transfer stock.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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