For my first post back I want to update the last post I did before my hiatus. On Feb 10, I posted on how well the MLP sector did in January, with it being the second best January ever, and that good early year performance usually leads to strong results going forward. Lets see what the MLP sector has been up to since then.
The chart below shows the performance of the AMJ ETF that tracks the MLP sector. What a year so far is all I can say! The MLP index total return for Q1 2013 was 19.7%, far outpacing the SP500. That’s a dam good year of performance in just 3 months. MLP s have advanced a little further in April as expected, given that April is a dividend capture month and historically does well as I’ve discussed before. I hope you enjoyed some these gains – this was a great risk/reward setup at the beginning of the year and at the end of January.
The performance in many individual names has been even more impressive. YTD performance, price-only, even with the recent pullbacks: EPD – 25%, NGLS – 27%, TRGP – 28%, PAA – 28%, WMB – 18%, KMI – 12%, KMP – 18%. OKS was about the only real dog among the big MLPs and even that horrible performance was 2% up plus the dividend. Some of the more spec names like LNG and GEL are up almost 50% and 34% respectively. Needless to say that this kind of performance in such a short time doesn’t come around very often. Obviously, the next question is what now?
A couple items to look at to give us an idea of what MLPs could do from here are valuations and historical patterns. First, historically, May is not a good month for MLPs. Its the second worst month, after November. You get the fade of the dividend capture trade, you get equity issuance by many MLPs, and you get part of the general market ‘sell in May’ effect. Second, MLP valuations are not as compelling as the were in November of last year, nor at the beginning of this year. The chart below is the one I like to use for MLP valuation.
On a yield basis, MLPs are approaching lows in yield since the 2008 crash, but not by much. On a yield spread basis MLPs are not as compelling either and are approaching the average spread. However, historically even these average spreads have led to good returns in the past. Also, compered to other yield based investments MLPs, even at these ‘low’ yields of 5.8% look pretty darn attractive especially against what I think are over valued yield investments like REITs, Utilities, and Junk bonds. Basically. I’d be looking here for a mild pullback in May generating some good setups for the rest of the year. As always, I prefer individual names vs the ETFs and I prefer to have more growth over yield. WMB, ARP, CLMT, and TRGP are some of the more growth oriented names that I like. And I’m always looking for ways to own some of the big boys especially Kinder Morgan and Enterprise Products and good prices.
Hope that helps.
Disclosure: currently long CLMT, ARP, and WMB with some tight stops.