I can’t say I’m happy to be finishing the first quarter in last place in InvestorPlace’s Best Stocks for 2018 contest.
But I’ve been here before.
In the 2016 contest, I was dead last by the end of the first quarter, and at one point in time I was down by more than 70%.
Yes, you read that right. My pick that year — midstream pipeline operator Energy Transfer Equity (NYSE:ETE) — was sitting on a 70% loss. But by year end, it had made back all of those losses and finished the year with a 53% gain — handing me the Best Stocks crown in the process.
Then, as now, the entire pipeline sector had just come off of a brutal bloodletting. As I write this, many of the blue chips in the space are down 20%-30% from their 52-week highs.
But by the second quarter, the fear started to dissipate, and buyers began to return to the market. 2016 ended up being a good year for the sector, and I expect that 2018 will be as well.
To start, MLPs are one of the few cheap remaining sectors in an otherwise expensive market. It’s looking more and more that the infamous “FAANGs” trade of buying and holding large-cap tech names like Facebook, Inc. (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) might have run its course for now. Investors will be looking for a new investment narrative, and MLPs are too cheap to ignore.
With the sole exceptions of the 2008 meltdown and the 2015 energy crisis — two extreme examples unlikely to be repeated any time soon — MLPs are quite literally the cheapest they have ever been in history relative to bonds, and the sector yields about 8.5%. Money flows where it is treated best, and I don’t see yields that high being on offer for long.
Now let’s take a look at my entry for 2018, blue chip MLP Enterprise Products Partners L.P. (NYSE:EPD). Enterprise, like the rest of the MLP sector, has taken its lumps and is down about 9% year-to-date. But news for the company has generally been positive. The company beat analyst expectations for both revenues and earnings last quarter and raised its distribution nearly 4%.
So, there is no obvious, company-specific “reason” for EPD’s decline other than general weakness in the sector as a whole.
There are other factors at play here as well. Consider the price and volume action in EPD’s stock on March 27.
Out of nowhere, there was an enormous surge of selling on heavy volume around 10:45 that ended just as quickly as it started. Rumor has is that a large closed-end fund specializing in MLPs was forced to liquidate a large chunk of shares in order to meet a quarter-end deadline to reduce leverage.
We’ll never know for sure, of course. But it makes sense. And in a market with relatively few buyers (MLPs tend to be dominated by small retail investors and a handful of leveraged MLPs) one large seller can obliterate a stock in the short-term.
The good news is that the selling pressure should subside with the ending of the quarter. I can’t guarantee that this means EPD will move sharply higher from here. But I can say this: In a choppy market, I’d rather own a stable cash-producing workhorse like EPD than a volatile tech stock. At current prices, EPD yields nearly 7%.
We still have three quarters remaining, and I still like EPD’s chances.
As of this writing, Charles Sizemore was long EPD and ETE.