MLP Jan 2013 results – second best ever

Just wanted to update the January effect results for the MLP sector. As I noted in previous posts January tends to be the best performing month for the MLP sector. January 2013 ended up being the 2nd best January for MLPs ever, with a total return of 12.6% Here is an updated chart as of Friday’s close.

Hopefully, you participated in at least some of that move. Now, the important point – history says that strong a strong January leads to strong full year results. And the stronger the January the higher the full year results. This should not be surprising if you’re familiar with the January effect for stocks in general and the power of momentum in markets. As it turns out, when MLPs start out the year with returns above 10%, total year returns tend to be above 30%. So, 2013 has the potential of being a gang buster year for MLPs. Valuations are still quite reasonable as well, see chart below, and the US energy sector in general is in a bull market that is likely to last for years.

I’ll throw in the typical caveats of do your own homework, that history tends to rhyme not repeat exactly, etc… but the data suggest the potential for great MLP returns this year. Of course, because of MLPs special tax status, there is always government policy risk. But what most investors seem to have missed is that the most recent IRS opinions with respect to MLPs have actually expanded the type of assets that are eligible for the special status (for example, WPZ’s ethane cracker qualifying for MLP status). See this good Morningstar article summarizing the issue.

In the short term the sector looks to be taking a bit of a rest as you can see in the first chart. Looks like a bull flag to me and we could see a pull back to 42, 41.5, or even 41 without doing much damage to the longer term trend. In short, MLPs look to be setup for a great 2013.