3 Good Buys in MLPs

05/26/2011 11:00 am EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

Recent selling in master limited partnerships (MLPs) has presented some low-risk entry points, allowing buyers to tap into sizable yields and attractive growth prospects.

Master limited partnerships (MLPs) were hit by a sharp downdraft in early May following concerns that the Treasury department was considering making pass-through entities pay corporate taxes as opposed to passing tax liabilities to individual unit holders.

The Alerian MLP Index fell from a late-April high of 391.85 to a low on May 17 of 347.53. This was a drop of over 11%, but some of the less-liquid individual MLPs declined even more.

It seems unlikely that these new tax proposals will ever get through the Republican-dominated House, which begs the question of whether some of the MLPs have reached bargain-basement levels? (See related: Big Profits in Energy Pipelines.)

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Chart Analysis: The JPMorgan Alerian MLP ETN (AMJ) is the most liquid of the MLP ETFs with average daily volume of over 900,000 units. It is currently yielding 4.58% and seeks to replicate the performance, net of expenses, of the Alerian MLP Index. It has an expense ratio of 0.85%.

  • From the early-May high at $39.42, AMJ hit a low last week of $35.21, as both the starc-band and support (line a) were reached
  • From the weekly chart, there is additional support in the $33-$34 area
  • The weekly OBV did confirm the recent highs, which is consistent with a positive intermediate-term uptrend. It is well above support at line b
  • The daily OBV (not shown) is still negative even though AMJ has bounced from the recent lows
  • AMJ has first resistance at $37.25 with stronger resistance in the $38 area. A move back above $38.55 should be enough to turn the daily trend positive

Kinder Morgan Energy Partners LP (KMP) owns and manages energy transportation and storage assets both in the US and Canada. It has a current yield of 6.20% and has increased its dividend for 14 consecutive years.

  • KMP briefly touched the $78 level on April 26, and just 15 days later, it hit a low of $70.41. The uptrend (line d) was briefly violated on the decline
  • The volume on the drop was quite high, and for several days, it was twice the average daily volume. The daily on-balance volume (OBV) dropped below its weighted moving average (WMA) and the uptrend, line e. The current pattern suggests it may take another week or two before the corrective pattern is completed
  • The weekly OBV (not shown) looks much stronger and is still in a solid uptrend
  • KMP has rebounded with initial resistance in the $74.50-$75 area. Stronger resistance resides above $76

NEXT: 3 Ways to Profit from MLPs

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Magellan Midstream Partners LP (MMP), with a market cap of $6.6 billion, is only a quarter the size of Kinder Morgan. It has a current yield of 5.3% and trades 280,000 units per day. In early May, MMP reported a 40% increase in net income and also raised its dividend in late April.

  • From its recent highs at $63.10, MMP has held up better, making a recent low of $55.55 after testing the rising 40-week moving average (MA)
  • There is even stronger support in the $52.80-$53.30 area, which corresponds to the 2007 highs (line a) as well as the weekly uptrend, line b
  • The weekly OBV may move back above its weighted moving average this week after breaking out of a major base formation (line c) in late 2010
  • The daily volume is rising, but it is still below its WMA despite the rebound this week
  • There is now initial resistance for MMP in the $60-$60.70 area

What It Means: Technically, it seems as though the selling in MLPs was overdone in early May, and the decline has created more attractive yields. From the daily analysis, we could see another pullback, but I would expect the recent lows to provide good support.

How to Profit: With its diversification, JPMorgan Alerian MLP ETN (AMJ) still has an attractive yield. I would go 50% long at $35.44 and 50% long at $34.88 with a stop at $32.64 (risk of approx. 7.1%).

For Kinder Morgan Energy Partners LP (KMP), go 50% long at $72.44 and 50% long at $71.32 with a stop at $68.83 (risk of approx. 5%).

For Magellan Midstream Partners LP (MMP), go 50% long at $57.52 and 50% long at $56.80 with a stop at $52.62 (risk of approx. 8.2%).

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