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One Stock to Cut Through the Volatility

09/23/2011 8:30 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

This pipeline partnership works 24 hours a day whether world markets grow or shrink, writes Mark Skousen of High-Income Alert.

The market rallied every day last week, but this week it’s back on the defensive.

You’ve heard all of the bad news out there. The budget deficit keeps growing, while the economy isn’t. And business confidence is dropping with the dollar, the real estate market and the outlook for the Eurozone. But as famed money manager Bill Miller likes to say, “If it’s in the papers, it’s in the price.”

Remember that interest rates are low, too. That isn’t likely to change anytime soon. Fed Chairman Ben Bernanke has pledged to keep short-term rates near zero for the next two years—and energy prices are coming down.

Plus, valuations are cheap. US corporations have reported all-time record profits in each of the last four quarters. Today, the S&P 500 sells for just 13 times trailing earnings, well below the long-term average of 16.4.

Investors are pessimistic and afraid. This may seem like a negative, but it’s not. Investor sentiment is an excellent contrarian indicator, especially when accompanied by low valuations.

Despite the carnage in world equity markets in recent weeks, some companies are shrugging off the volatility.

One of them is Plains All American Pipeline (PAA). Based in Houston, Plains is a publicly traded limited partnership that transports, stores, and markets crude oil and other refined products, including liquefied natural gas.

Its diversified portfolio plays a vital role in the movement of US and Canadian energy supplies. The partnership transports over 3 million barrels of crude and other refined products a day through more than 16,000 miles of pipelines.

Pipelines still offer by far the cheapest way to ship oil and gas over long distances. Trains and trucks offer some competition, but pipelines are much less labor-intensive and require little maintenance.

Furthermore, there are significant barriers to entry. Acquiring the regulatory approval to build a new pipeline is a long and difficult process. And the significant investment required generally stops new competition in its tracks.

Financial metrics at Plains are top-notch. In the most recent quarter, net income jumped 72% on a 45% increase in sales. I estimate the partnership will earn over $4 a share this year and next.

And the insiders are backing up the truck. In the last few weeks, Director John Raymond purchased more than 15 million shares at an average cost of $59.30. (Insiders own approximately 12% of all of the company’s outstanding shares.)

This is a stock with plenty of upside potential, plus an attractive 6.6% dividend yield.

So pick up Plains All American Pipeline (PAA) and place a protective stop at $50. If you prefer to play this one more aggressively, try the January 2012 $65 calls. 

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