The new trading year is off to a bang, with the S&P 500 having gained 5% for January … so now it’s only fitting to take some profits. An area that was particularly successful in 2012 for high-yield investors was master limited partnerships, but it might be time to unload some of those names since the market looks due for a pullback from overextended levels.
While investors fled all sorts of income-producing securities ahead of the fiscal cliff (out of fear of higher taxes on dividends), many income investors did load up on MLPs because of their tax-advantaged status.
One way investors were taking advantage of MLPs was through the ETRACS 2x Leveraged Long Alerian MLP Infrastructure ETN (NYSE:MLPL). This exchange-traded note uses 2x leverage on the Alerian MLP Infrastructure Index, which is composed of 25 energy infrastructure MLPs.
Some of the top holdings in the Alerian MLP index include Enterprise Products Partners (NYSE:EPD), Kinder Morgan Energy Partners (NYSE:KMP) and Plains All American Pipeline (NYSE:PAA). All of these names are good buy-and-hold candidates, and had at least a 5% gain since Dec. 1, with PAA clocking in at a whopping 12% gain. So needless to say, with 2x leverage on those and more, MLPL has treated my subscribers well over the past two months, vaulting from mid-December lows of $37 to today’s price of $46 — a 24% run plus dividends.
Being that MLPL is a leveraged asset, I wanted to cash in on the gain while the sector was running hot.
Well, It’s a Bit Late for That
Bragging aside, why am I telling you all this? Well, first of all, I’d recommend selling MLPL if you own it. But I also see additional opportunity in this ETN in the short-term.
Some argue (primarily short sellers) that the rally is exhibiting a bit of irrational exuberance, and that we should see a bearish reversal any day now. But the market can remain overbought longer than the shorts can take the pain. There’s a lot of capital still sitting on the sidelines, and I think the case for an extension to the current rally is valid after it goes through a brief period of well-deserved consolidation. When I mean brief, I mean a matter of a few days — and then you can expect the S&P to make a stab at 1,525, where a leveling off will ensue.
MLPs like the ones in the Alerian MLP Index are solid buy-and-holds for their tax status and high yields, but I see some downside in those stocks when the market correction comes, and that could mean excellent buying opportunities.
Recommendation: MLPL currently yields around 10% and is trading at $46. I foresee a drop down to $40 levels in a market correction, and I’d recommend jumping on it then. A word of caution, though — this is a leveraged investment and so while you get twice the upside, you also get twice the downside (or worse), so you must be able to stomach that risk.
Bryan Perry is editor of Cash Machine, a newsletter focused on dividends and income investing. As of this writing, he did not own a position in any of the aforementioned securities.