Time to Buy the Dip on Texas Pacific Land Stock?

Participate in financial markets long enough, and an investor is apt to hear the saying, "Stocks don't move up in a straight line." Even in the strongest-trending bull markets, hot stocks take breathers.

Due to the war in Iran, it's felt as though some energy stocks moved higher in a straight-line fashion. Texas Pacific Land (NYSE: TPL) exuded such vibes in February, gaining 45% and ranking as the S&P 500's best performer.

Texas Pacific Land stock took a tumble, but investors may want to keep an eye on this energy royalty name. Image source: Getty Images.

Investing's "laws of gravity" have since kicked in as shares of the energy royalty company plunged 17.1% for the month ended April 2, extending the stock's retreat from its 52-week high to 18.8%. That's flirting with a 20% drop from a prior high, which defines a bear market. Those data points confirm that investors have much to consider when evaluating Texas Pacific Land as a buy-the-dip candidate.

Two sides to the story

Even with its recent pullback, shares of Texas Pacific are up more than 54% year to date, but a case can be made that, on a technical basis, this isn't a strong stock in a strong place. It recently slipped below its 50-day moving average. Often, that's a bearish signal, and if that plays out, investors can get involved with this stock at better pricing.

There's another side to the story. Some market participants may be looking at Texas Pacific through the lens of oil prices, speculating the stock would be vulnerable in an Iran resolution scenario. Indeed, the company is one of the largest owners of real estate in the oil-rich Permian Basin in Texas, but it's not an exploration and production outfit, meaning its share price shouldn't be tethered to crude's price action.

Although it's not a traditional REIT, it operates a "toll road" business model, collecting revenue from oil, water, and pipelines built on its substantial portfolio of West Texas real estate. Toll roads are predictable, and investors love predictability.

That doesn't mean Texas Pacific is boring or sleepy. It's actually undergoing a multi-pronged corporate pivot that includes bolstering its water desalination capabilities in one of the most parched regions of the U.S. While it's not a pure-play AI stock, it has some artificial intelligence (AI) inroads through its energy data hubs.

The near term is tricky, but the long-term outlook is bright

No, Texas Pacific's chart isn't particularly inviting at the moment, and, right or wrong, this stock could be caught up in the downdraft if oil prices rapidly retreat.

Those are considerations, but they don't change the point that water access and disposal are essential for oil drillers in West Texas -- so much so that investment firm Horizon Kinetics believes that while the stock has been an impressive long-term performer (up 2,650% over the past decade), more upside is ahead. Though it recently sold part of its Texas Pacific holding, Horizon Kinetics remains one of the company's largest investors, controlling more than 14% of the shares, believing more upside is ahead.

That's not a stretch when factoring in the data center opportunity set and the company's renewable energy exposure, which comes with long, predictable lease income streams. Speaking of income, Texas Pacific churns out cash flow and has no debt. Those factors are stirring hope the company will deliver a special dividend and/or boost the size of its share repurchase program at some point this year.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.