A Glance in the Rear View Mirror
In March of 2013, I penned my 14th edition of kortsessions.com, “Buy, sell or Fold?”. We had just broken definitely above the previous record high ( March 2000, s&P 500, 1550). The actual record high did occur in October 2007 (1576) but it was a very short-lived move before the collapse to new bear market lows in 2008. For my purpose I define the secular bear market as the period between March 2000 and March 2013. Subsequently we emerged into a new secular bull market that is close to reaching its seventh birthday. The S&P closed Friday at 3141, up a little over 100% during the past nearly 20 years.
This is really not a very good performance considering previous 20-year historical periods. The S&P 500 return (1998 to 2018–last twenty year segment we have data for) was only 4.5% compounded. This was not so hot as the range of these 20-year returns averaged, longer-term, between 4% and 8%}. This is especially true when you consider that the 1998 through 2018 period had as a start measurement point S&P 1229 and not the 1550 level of March 2000.
While we are at it let’s talk valuation at the 2000 peak and now. Back then nobody cared (or at least very few investors cared) about valuation. Everybody wanted to own stocks for the long-run for superior returns they provided. The S&P 500 PE on trailing twelve months earnings was 30. Its yield was 1% vs. a 10-year US Treasury note at 6+%. Today many are very cautious about stocks. The S&P 500 has a PE of 19 based on estimated 2019 earnings of $161, and the yield is 1.97% with ten-year yielding 1.77% (advantage S&P by 20 basis points vs. advantage 10-year treasuries 500 basis points in 2000).
Importantly, things for many investors in 2013 (as they are now) were very ‘iffy’. This was completely the opposite of what we saw at the peak in 2000 (most were certain stocks were great things to own). Our advice in our 2013 post, as it has been all the way up, was to stay invested, and for those not invested to use a measured approach to add to equity holdings. I suggested that doing so then might be quite rewarding in the long-run.
I am still of this opinion today.
For those looking for an idea that has not been marked up …
Actually it has been marked down severely …
Read on at your own peril. First of all I own the group that I am about to recommend through a closed end investment company. Secondly, I have been very wrong on this call. As such I may be committing the sin of ‘getting married’ to the industry and the stock … not being able ‘to see the forrest for the trees’. Those of you with stout heart may proceed.
The industry is the energy transportation and processing
Master Limited Partnership (MLP) sector
As a proxy for the industry I use the Alerian MLP Indes (.AMZ). The index peaked in 2014 at 531. It closed 11/29/19 at 201, its lowest level in lowest level in almost 4 years. The previous recent low occurred in January of 2016 at 199. At that time the S&P 500 was 2038. So essentially vs. S&P and everything else in the market the MLPs have had unbelievable underperformance. They are hated … to be avoided.
The industry was built on the idea of rolling up mundane (very slow growth) pipeline assets (attractive cash flow generators) held by energy companies into the tax efficient structure of a limited partnership, then re-marketing them to the public as a source of a slowly growing, dependable tax-efficient yield … et voila! … the birth of the MLP sector. Because the underlying cash flow growth was very slow growing the MLP’s distribution growth came via acquisitions. To accomplish these deals money was borrowed and more shares sold to pay down the debt (the MLPs were serial diluters). Paying most of their cash flow out meant little or nothing was left for internal growth or maintenance capex.
The music stopped in 2014. A precipitous decline in the price of of West Texas Intermediate (WTI) crude oil from $107/Bbl in June to below $50/Bbl by year-end marked the beginning of the end. This decline raised the specter of counter party risk … the inability of producing companies, the MLP’s customers, to meet their volume commitments due to potential bankruptcy brought on by falling prices. This in turn brought those dependable cash flows covering all those dividends and a mountain of debt into question.
Yes, there were some bankruptcies and dividend cuts. The industry went through a gut-wrenching period of transformation and restructure. That is past with most participants coming out the other side much stronger companies … smaller yields … greater retained cash flow for expansion and capex.
It seems now that for many we have reached the point where nobody cares about the improved fundamentals. Market mechanics have taken over … the downside of computer algorithmic trading, the unwinding of a retail disaffection with the group caused by past dividend cuts and poor performance and, as a result, the painful unwinding of retail-held ETF positions. Finally, last, but not least, we have loss tax selling. Many are saying or thinking that these stocks have been horrible dogs … (don’t confuse me with the facts) oil prices are down, their high yields are a “warning sign” (dividend cuts ahead) … get me out! I would be better off out of the market altogether or in a different sector. This looks like bottom talk to me.
This looks like a buying opportunity
(considering all the caveats that I presented above)
Ways to Invest and diversify without having to pick individual stocks
Tortoise Midstream Energy Fund (NTG) 11/29/19 close $9.88, yield 17.11 (levered) Closed end fund, discount to NAV 6.44%
If you own these stocks, no matter how frustrated you are with the sector, in my opinion to SELL or Fold at this point makes no sense.
Good luck and remember I own NTG and have purchased shares recently.
Looking forward, not in the rear view mirror, what is your take?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.