Stocks are off to a slow start this week as investors start to prepare for second-quarter earnings reports. Analysts are likely to trim their earnings estimates, just as they did in March, and that may cause some disruption in share prices as traders adjust. We could see an important analyst cut his rating on an entire strong group, such as tech, brokerage or defense companies.
But the bulls have a lot of momentum on their side right now having battled so far off the March low, and they will not give up their new ground easily. The best possible resolution of the current set-up would be action much like the past four weeks: occasional spurts higher, then light down days and flat-lining to consolidate. Nice and easy. If the bears give up on defending the 950 level ofthe S&P 500, they will next fall back to 1,000 to mount a more concentrated counter-attack.
In the meantime, stocks that are less economically senstitive than average have a decent shot at keeping their values. One that my model likes this month is Williams Pipeline Partners (WMZ), which was spun off from natural gas giant Williams Cos. (WMB) early last year.
WMZ differs from its parent by focusing on distributing natural gas to the Pacific Northwest with virtually no competition. It owns a 35% interest in the Northwest Pipeline GP, a system that extends from New Mexico’s San Juan Basin all the way to the northwest corner of Washington State, and runs through Utah, Wyoming, Colorado, Idaho and Oregon along the way. It sells a lot of the gas to all those states, too, as well as to Arizona and California. Parent company Williams owns the other 65% of the line.
In total, WPZ runs 3,900 miles of pipeline, with access to gas in the Rocky Mountains, San Juan Basin, and the Western Canadian Sedimentary Basin. With a capacity of about 12.5 billion cubic feet of natural gas storage capacity, it can provide huge quantities of it to meet the fast growing area’s demands. Customers include municipal utilities, electric power generators, and natural gas producers.
WMZ is a master limited partnership (MLP), which means that, in exchange for avoiding corporate income taxes, the firm must pass out the majority of their profits to investors in quarterly required distributions. These firms have terrific yields — about 7% in WMZ’s case. The parent just has to make sure the spin-off has enough cash on hand to pay out those required dividends, which is not an issue in this case as cash flows have been fine despite the recent softness in the economy.
With a little under $7 million cash on hand, no debt, and access to about $380 million in credit through its parent company, WMZ shows few weaknesses. It has secured lots of long-term contracts, which is responsible for the strong cash flow. The firm employs no one outside of management — no piping crews, no maintenance, nothing. All of that is taken care of by WMB. In fact, both management teams look roughly identical, with Williams Companies Chairman and CEO Steve Malcolm also acting as head of Williams Pipeline.
WMZ shares are at an all-time high at the moment, a buck above their IPO price, which is a good thing. Remember, all new highs are bullish (except for the last one). The stock was trading at twice normal volume earlier this week amid renewed interest in the whole group. With a price/earnings multiple of just 9, it remains cheap and has proved consistent on its returns, rising incrementally in every quarter so far. Its most recent quarterly report was positive, showing net income of $13.7 million, compared to $12.9 million in the first quarter of 2008.
WMZ shares were punished by the credit crunch last year, but investors are coming back. Barron’s has been bullish on WMZ lately, calling it a ”juicy yield play” with significant upside, a double win. I agree. It’s a buy on dips, as it should perform steadily well in terms of capital appreciation as well as providing income.
Keep in mind, though, that MLPs’ distributions are up to 90% tax deferred, and come on a K-1 schedule rather than on a 1099. This has no impact on the companies’ merit as investments but you do need to be aware that the tax treatment is a little different than you may be used to.
