2 New Stocks For Your Watch List

by Charles Sizemore | April 12, 2012 7:30 am

This month, I’m going to add two outstanding new investments to the SIL portfolio, but with one major qualification. Both stocks are in pronounced downtrends, and we do not want to attempt to catch a couple falling knives here.

So for now, place each on your watch list. We’ll look to pull the trigger in the weeks ahead.

I’ll start with Kinder Morgan Energy (NYSE:KMP[1]). Kinder Morgan is a special kind of security known as a master limited partnership (“MLP”). Unlike a corporation, which gets taxed as an entity (and double taxed in the case of dividends), partnerships do not pay income tax. Instead, the investors are required to pay the taxes.

Here’s the best part: generally speaking, there are no taxes.

MLPs tend to be concentrated in sectors with large capital expenditures and the large non-cash depreciation and amortization expenses that come with them. In other words, even while the assets throw off gobs of cash to their investors, they show accounting losses. The losses have the effect of lowering your cost basis, meaning that you’ll pay more in capital gains if or when you eventually sell.

But whoever said you have to sell?

In a world in which bonds pay pitifully small rates of interest, many MLPs—including Kinder Morgan—pay distributions of 5 percent or more.

I’ve been reluctant to mention MLPs in past newsletters because I kept hoping we’d get a correction that let us buy at a cheaper price. As a sector, MLPs have gone nearly straight up since the market bottomed in early 2009.

At long last, that day has come. While the S&P 500 enjoyed its best first quarter since 1998, MLPs have actually lost money in 2012. The sector has been in a pronounced downturn since mid-February. We’ll have our opportunity soon. But for now, let’s be patient.

My next recommendation is Arcos Dorados (NASDAQ:ARCO[2]) the largest operator of McDonald’s franchises in Latin America. (Yes, for you Spanish speakers, “Arcos Dorados” translates to “Golden Arches”).

I should give credit where it is due. Arcos was the recommendation of fellow InvestorPlace “10 Stocks for 2012” contestant Josh Brown[3]. Given the stock’s fit in the SIL’s investment themes, I’m just jealous I didn’t find it first.

Arcos is a direct play on rising incomes in the region and the growth of the region’s middle class. It is the ultimate Emerging Market Consumer stock, and a company you can plan to potentially buy and hold for years.

Unfortunately, it’s also been a lousy performer thus far in 2012. Arcos had a bad quarter, and this combined with weakness in Latin America emerging markets in general has caused the stock to lose 10 percent year to date.

Again, I have no interest in trying to catch a falling knife. We’ll give this stock a little more time.

Endnotes:
  1. KMP: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMP
  2. ARCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=ARCO
  3. InvestorPlace “10 Stocks for 2012” contestant Josh Brown: http://investorplace.com/2011/12/arcos-dorados-mcdonalds-stock-emerging-market/

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