Its pretty common investment wisdom that a bull market hides a lot of mistakes. Companies of all types, quality, and sizes go up together. Fortunately, this doesn’t last forever. Tough markets tend to separate the wheat from the chaff and expose any weaknesses in business models, cost of capital, etc… I’ve noticed this taking place in the MLP space recently. The table below shows a list of the MLPs that I track and how much they have come off their 52 week highs.

Some difference. The strongest performance has been put in by EPD which is down only 4.46% from its high. Other strong performers have been KMP, WPZ, PAA, ENB, LINE and MMP. The weakest by far has been NKA which is down by 46.7% from its high. I can’t think of a better comparison than EPD and NKA. While EPD is hitting the cover off the ball, NKA won’t even make enough to cover their distribution this year. If you want to see how stark the differences are I recommend listening to their recent quarterly conf calls. Not all MLPs are created equal. Of course, now the contrarian in me is interested in NKA after the recent bloodbath. But that’s for another post.

This is yet another reason to own individual MLP issues versus owning the whole index. Individual company performance, business models, capital structures matter a lot in the long run.


3 Comments

Joe · August 13, 2011 at 11:17 am

I’m long EPD, OKS & KMP. I like them all and think they are close to being the best of the best. I would like to see OKS on your list.

    libertatemamo · August 14, 2011 at 11:12 am

    Added OKS to the list Joe. Thanks. Paul

MLP valuation at August end « Investing For A Living · September 1, 2011 at 9:59 am

[…] MLPs, the AMZ, are trading at a yield of 6.5% and a spread of 4.31%. In relation to their historical trading ranges, MLPs are trading at a lower dividend yield than average but way above their historical spread to treasuries. And here is lies the dilemma when looking at MLP valuation in today’s market. Usually, especially at the extremes, these two metrics move together. In other words, when spreads indicate the MLPs are cheap then the dividend yield is also signaling the same thing. This was definitely the case in the 2008 crises which was the extreme of extremes for MLP history. But this time is different, or so it seems. The question is whether the dividend yield is more correct or the spread to treasuries. Hard to tell, there are many many factors involved. For example, the MLP sector is much bigger, more stable, and more mature than it was 20 years ago. This alone would indicate that the sector would and should trade at a lower dividend yield than in the past. Personally, I lean toward the spread to treasuries as being the better indicator, especially short term, of value which indicates to me the sector is undervalued. However, even better is to focus on individual MLP names which I think is the best way to invest in the sector as I’ve discussed here and here. […]

Comments are closed.