A Boring, but Profitable, Stock Rally
03/14/2013 9:00 am EST
Who needs sexy when you can make double-digit yields? So asks Bryan Perry of Cash Machine, who shares some of his favorite plays today.
Nancy Zambell: My guest today is Bryan Perry, the Editor of Cash Machine, published by InvestorPlace Media. Bryan, welcome, and thank you so much for joining me.
Bryan Perry: Good to be with you. Thank you for having me.
Nancy Zambell: Today in the market, we are seeing history made, aren't we?
Bryan Perry: We sure are. In the Dow and S&P. But if we take out the historic highs, the Nasdaq is still 30% below its market high of 5,000, set back in 2000.
Nancy Zambell: That's probably a good thing, right?
Bryan Perry: Yes, that was a true bubble. But even with Apple (AAPL), the big leader for the last couple of years, the market is still down for the count right now.
A lot of it (the rise) has been led by consumer staples—Johnson & Johnson (JNJ), General Mills (GIS), Clorox (CLX), Colgate-Palmolive (CL), and Hershey (HSY), etc. Some of that was sparked by the buyout of Heinz (HNZ) by Berkshire Hathaway (BRK.B), but they are the types of names—the everyday products—that people have to have.
Some discretionary names have started participating as well, primarily those related to housing, like Home Depot (HD). They’ve really led very well in the home improvement area. If people are going to spend money in this economy, they want a return on that money, and that is right back into the home, in their nest egg.
Nancy Zambell: They are not really sexy stocks, are they?
Bryan Perry: No, they're not. I think that is a good thing that we are not being lured into those types of companies. However, there are names like Netflix (NFLX), which has done hugely well.
There is very strong momentum in health care, whether it is biotech, or in my area—the high-yield health-care REITs. And certainly some of the big pharma stocks, despite the fact that you would think Obamacare would pressure them from the standpoint of pricing. Generic stocks have done well, too—the McKessons (MCK) of the world, companies like that.
So the market has been led by a quality rally that I think will probably hold itself together, based upon the fact that the leadership isn't in the purely historical sectors like technology and financials that led the market in the past.|pagebreak|
Nancy Zambell: Well, you really have to look beneath the surface. I’ve heard a lot of people in the last couple of days saying we are setting records, but we are certainly going to have a downturn now, just based on the numbers. They are not really looking beyond that, to what is actually leading the markets.
So, what you are basically saying is, yes, we could possibly have a little volatility, but we also expect this (rally) to continue because these are solid companies.
Bryan Perry: They are, but bear in mind that the people that monitor and look over the indexes, like the S&P and the Dow, will shuffle the losing names out of those indexes during the course of the years and supplant them with names that they believe are better-performing names.
I think that it won't be long before Hewlett-Packard (HPQ) might be forced out of the Dow, with a recovery name like American International (AIG) possibly coming back. It is now the most widely-held stock by hedge funds, replacing Apple this year.
And AIG has made a nice move. It is one of those very liquid names. If the people at the Dow think that there is a lot of upside for that stock, they will certainly find room for it in the index and get rid of something that is not working, like Alcoa (AA), which has been stuck at $9 a share for years, and currently the mid $8s. It just can't get out of its own way.
So there is a lot going on, lots of headlines. A lot of these indexes are just really getting back to the flatline of the lost decade.
Look at the S&P: Right now, it is trading at 1,540, which is great. That took out the 1,530 resistance area. But really when you look back to 2007, you are really just getting back to where it was before the real meltdown. The high for the S&P in 2007 is right around 1,580. So we are still not there. So a lot of people are just getting back to even.
Nancy Zambell: Most of the companies that are leading the way are also dividend payers, correct?
Bryan Perry: They are. I think that people who want to wade back into this market want to have something that is a good cash cow, if in fact we do go into these periods where the market trades sideways for several months.
Nancy Zambell: Bryan, which sectors do you think are going to lead the way, in terms of dividend stocks?
Bryan Perry: I still think you are going to see a lot of the master limited partnerships, which has been the strongest-performing sector of any sector for the last five to seven years in the energy patch.
I still think they are going to do very well—especially with this momentum now for domestic energy policy taking on a new level of enthusiasm. It is a good job creator; it gets us out of the Middle East; it allows for the winding down of the military presence over there. So it seems to have a triple effect on the positive implications for US domestic policy, as well as capping the price of oil and gas at levels where we can go to the gas station and heat our homes at a reasonable cost.|pagebreak|
There are several MLPs that I have warmed up to and recommend to Cash Machine investors, that are paying upward of 9.5% to 10%. When you consider that income tax brackets are going higher, that is a nice equation for people, because it gives you an inflation hedge, tax-free income, and you are beating just about everything else out there, in terms of a cash flow—from the standpoint of a 9% yield.
Nancy Zambell: Can you give us a couple of those names that you like right now?
Bryan Perry: Certainly. I like Memorial Production Partners (MEMP). It has a current yield of 10.9%, and was recently recommended by Bank of America and Merrill Lynch.
The stock trades around $18.53. It has only been public for about 1 1/2 years, so it is under the radar for a lot of people that are used to buying the big names like Enterprise Products Partners (EPD), Linn Energy (LINE), or Kinder Morgan (KMP). This is a name I think is going to come under accumulation.
What I like about the model for some of these newer MLPs is that they are not exploring so much as they are just raising money through secondary initial offerings and secondary offerings. And they are buying proven properties that already have bona fide production numbers.
Nancy Zambell: So they don't have to do a lot of drilling.
Bryan Perry: Exactly...you take some of the wildcat speculation out of that. These particular MLPs have been able to move higher because they have proven numbers.
And they hedge 90% of their production for the current year, 80% for the next year, and 70% thereafter. That leaves some upside, but they are still able to protect their pricing at around $94 to $95 for oil, which is very, very profitable for them at these levels.
Another name I like is Breitburn Energy (BBEP). It pays about 9.57% current yield. The company just did a huge secondary offering. It was trading up around $21 and change and they priced it around $19.25. It is currently trading at $19.50 in today's market. They had blowout numbers in the most recent quarter—their earnings came in almost 400% higher than what the Street estimated.
I am looking at this type of MLP, where they are acquiring existing properties that have proven reserves, growing the business that way, and being able to use synergies from reasonable acquisitions to fold into their current operations. This is the model that I think is going to be a win-win for investors.
And the kicker is natural gas, which is still historically low, around $3.50 per MCF (thousand cubic feet). If that gets back up to $5 or $6 in the years ahead, as we continue to morph into a natural gas economy, with more and more exports and natural gas being utilized for commercial, residential, and utilities as they move away from coal, I think that is a double-barrel move for these types of names.
They are already making money in the oil market, and if gas moves up another 50% in price, these MLPs will be printing money. That, to me, is a nice place to go.
Nancy Zambell: What kind of a risk is the recapture tax? People really should hold these MLPs for the long-term, right?
Bryan Perry: Yes. The only risk I see is if they change the tax structure.|pagebreak|
I don't see that happening, because there is a bigger tent theory that is starting to take place now at the Department of Energy, where they’re actually forwarding the idea of putting in clean tech, wind farms, and solar—all these other types of clean energy—into the MLP structure. In doing so, I think the oil and gas players will maintain their safety under that net of tax-preferred income while embracing more types of entities in that structure.
Other areas we have worked with, like nitrogen fertilizer, is also very strong for the MLP owners who want something outside of energy but want to be part of another sector of the bull market. And that would be agriculture and food, as the corn demand around the world has really increased a lot as emerging markets want more corn-based products. Ethanol is a big user, about 40% of the US crop.
In that space, I have two names—Rentech Nitrogen Partners (RNF), paying about 7.5% yield, and it has been a huge winner, up about 75% in just the last year alone. The other is CVR Partners (UAN), up about 35% to 40% in the last year as well.
It's a nice way for investors to have a commodity play that pays a lot of cash flow in probably the No. 1 commodity out there outside of energy, and that is corn.
So that gives us a nice way to have what I would call non-dollar-based investments. If currency starts to lose value, you want some money in commodities. And this is an area where you can still get great cash flow and be part of two of the larger more important commodities in the world—if not the most important—and that is food and energy.
Between the blend, you are getting about an 8.5% to 9% cumulative yield. And the idea for high-yield investing is to have a portfolio of non-correlating assets that all balance each other out. Driving that is income—most of which we hope to be tax-preferred.
We want to be able to stay well ahead of traditional fixed-income investments with an inflation hedge built in. So that's really how you stay ahead of the cost of living, as well as stay away from a lot of the market volatility.
As the markets go higher, you tend to see the market look for these trap-door type, sell-off type situations. And you don't see that kind of volatility take place in the high-dividend areas nearly as much, because people aren't trading those names as much as they are looking to own them long-term.