A Smart MLP for the Short Term

08/17/2012 8:00 am EST

Focus: INCOME

The oil patch has some great bargains, especially on the master limited partnership side, so while you're waiting for the markets to work themselves out, grab some nice dividends in this top energy MLP, writes Lou Gagliardi of Cabot Wealth Advisory.

Crude oil prices are likely to continue to be very volatile for a while, but there are still some smart energy investments out there for the shorter term.

I recommend focusing on stocks with high dividend yields, low short-selling interest, good growth prospects, and strong balance sheets. If possible, invest in stocks that are trading near their 52-week lows. These stocks are positioned to grow when the energy sector stabilizes, and until then their dividends will provide solid income.

One stock I’ve recently recommended for the shorter-term (a six months to one year) investment time frame is Plains All American Pipeline (PAA), a Master Limited Partnership. Plains All American Pipeline transports and stores primarily crude oil, refined products and liquid petroleum gas (LPG) products in the United States and Canada. It operates in three segments: Transportation, Facilities and Supply, and Logistics.

I compared Plains All American Pipeline to three of its midstream MLP peer operators: Enterprise Products Partners (EPD), Magellan Midstream Partners (MMP), and ONEOK Partners (OKS). On a relative basis, Plains All American Pipeline stands out among the four as the better investment with the better dividend yield, low to insignificant short selling interest, good growth prospects and a good balance sheet.

PAA does trade near its 52-week high, but also trades at a relative 2013 price to earnings (P/E) discount to its peers. The company has significant positive net free cash flow even after deducting interest expense.

My price target for PAA is $97.65 per share over the next six months. My recommendation is to start with small purchases now and look to buy more on pullbacks toward support, particularly if crude prices soften. Invest for the long term, take the dividend, and be patient. Place a firm stop-loss order at $78.50.

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Related Reading:

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