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Despite inflation showing signs of easing, Fed policymakers signaled to continue raising interest rates throughout this year. In addition to hawkish comments from Fed officials, weak economic data fueled recession fears. U.S. retail sales dropped 1.1% last month, while factory production fell 0.6% for the first time since June. Amid worsening macroeconomic conditions, the World […]
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Please enjoy this updated version of weekly commentary from the Reitmeister Total Return newsletter. Steve Reitmeister is the CEO of StockNews.com and Editor of the Reitmeister Total Return.
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The bull vs. bear tug of war is at another critical juncture as they battle over 4,000. The two previous skirmishes were won by the bears.
I am referring to the big rallies that ran out of steam in mid August and early December. The hawkish Fed was the main catalyst each time to swing things back to the downside.
Will that be the case once again after the February 1st Fed announcement?
That is the topic that most deserves our attention at this time, and will be the focus of this week’s Reitmeister Total Return commentary.
Market Commentary
The boiled down version of today’s commentary can easily be labeled: Stock Buyers Beware!
That’s because price action is saying one thing…but fundamentals are saying another with the final verdict likely coming after the 2/1 Fed announcement.
Now let’s go back to the starting line by evaluating this picture of where we stand now with a possible breakout above the long-term trend line. Also known as the 200 day moving average for the S&P 500 in red below.
Yes, it appears that we have a break out forming at this time. However, see how similar events happened back in late March and late November before the bears took charge once again.
Chartists will also note that this is still quite bearish. First, because we are officially in a bear market. We would need to cross above 4,189 to state that a bull market was in place.
Second, we have a series of lower highs which is a negative trend until it is officially reversed.
To be clear, this could be the forming of the new bull market. And you should never fully ignore the wisdom of the crowd as it appears in price action.
Yet viewing this without the context of the fundamental landscape is a bit hollow. So, let’s switch in that direction where we have another crossroads. That being investors who are solely focused on the state of inflation (and likely future Fed actions) vs. those who see a recession forming.
This battle was at the center of my last commentary: Investors: Please OPEN Your Eyes. The main theme is that, yes, inflation is coming down faster than expected. But before you cheer that good news it is BECAUSE there is a recession forming which is normally the root cause of bear markets.
That recessionary forecast only grew darker this week starting Monday with a worse than expected -1% reading for Leading Economic Indicators. Check out this quote from Ataman Ozyildrim, Senior Director, Economics at the Conference Board (who creates this indicator):
“The US LEI fell sharply again in December—continuing to signal recession for the US economy in the near term. There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead. Overall economic activity is likely to turn negative in the coming quarters before picking up again in the final quarter of 2023.”
Next up to bat was the S&P Composite PMI Flash report on Tuesday coming in at 46.6. This was an even handedly bad showing as Services at 46.6 was on par with the nasty 46.8 showing for Manufacturing. (Remember under 50 = contractionary environment).
These poor economic readings make it hard to be bullish at this time. Even worse is that we are running head long into the next Fed announcement on 2/1 where they are likely to repeat their “high rates for a long time” mantra.
Bulls keep jumping the gun expecting a Fed pivot only to get smacked down again. Such was the case in mid-August when the 18% summer rally ended with the famed Jackson Hole speech from Powell had us making new lows in the weeks ahead. Then the October/November rally ran out of steam when Powell poured cold water on bullish aspirations with the higher for longer rate expectations.
To be clear, the Fed no doubt sees the same signs of moderating inflation. And yet just as clearly, there will be no change in their stance given how the higher for longer mantra was repeated ALL MONTH LONG at nearly every Fed speech in January including similar sound bites from Powell.
These guys are singing from the same song sheet on purpose. That is part of their mission to provide clarity to all market participants. And thus to expect them to abandon the higher for longer mantra as soon as the 2/1 announcement is borderline insane.
Yes, they likely will downshift to quarter point hikes. That seems appropriate at this time. But that is greatly different than ending rate hikes or going lower in time to stave off the formation of the recession at hand.
To boil it down, bulls could stay in charge of price action going into the 2/1 Fed announcement. This could have stocks looking like they are breaking out with some investors getting drawn in by serious FOMO.
However, going back to the main theme of this article, I would say strongly; STOCK BUYER BEWARE!
Simply to get bullish now coming into that 2/1 announcement given the facts in hand seems quite risky. Bears still have the upper hand til proven otherwise.
If by some amazing stretch of the imagination that the normally slow and steady Fed officials do a 180 degree turnabout to become undeniably dovish on 2/1, then certainly join the bull party that afternoon.
Long story short, the risk to the downside is greater than the risk to the upside which is why I remain entrenched in my bearish portfolio and recommend the same for others.
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If you have been successful navigating the investment waters this past year, then please feel free to ignore.
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Wishing you a world of investment success!
Steve Reitmeister… but everyone calls me Reity (pronounced “Righty”)CEO, StockNews.com & Editor, Reitmeister Total Return
About the Author
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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The pharmaceutical industry was in the limelight during the pandemic as it came up with therapies and vaccines. The industry has seen significant growth across multiple areas over the past few years, aided by research and development. The industry’s growth is expected to be driven by a rapidly aging population and the rise of various
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Forget about the metaverse. The “next big thing” in the world of technology is Generative AI, a type of artificial intelligence that is capable of producing original content from scratch. Someday—hopefully not too soon—generative AI will be able to write articles like this, thus putting me out of a job.
And one of the most important Big Tech companies is now making a huge investment in this area…
Venture capital investment into generative AI has increased 425% since 2020 to $2.1 billion in 2022, according to PitchBook. That is about as much as the amount invested in all of the previous five years combined!
The global market for AI-augmented content solutions likely hit $2.3 billion in 2022, and research from PitchBook predicts it will grow an overall 17% through 2025. But the group added that: “…the technology might not generate high revenues in the short term, as professions resist AI solutions and the technology still has to mature.”
One of the leading companies in this field is OpenAI, which was founded in 2015. Its ChatGPT made its public debut in December 2022. ChatGPT, which can converse with users, surpassed 1 million users in just five days.
So, it is notable that Microsoft (MSFT) is considering a $10 billion investment into OpenAI that would value the entire company at $29 billion. Let’s consider the implications of this possible deal.
Why Microsoft Is Interested in OpenAI
If Microsoft does go through with this investment, it will be doubling down (technically dectupling down!) on an already-successful bet—in 2019, the company invested $1 billion in OpenAI in exchange for the right to integrate the start-up’s work into its own products.
This deal included the use of Microsoft’s Azure cloud computing platform to conduct experiments. Under the deal, Microsoft got the first shot at commercializing early results from OpenAI’s research.
Since then, Microsoft has incorporated OpenAI technology into a coding tool. But Microsoft sees much more. As Eric Boyd, head of AI platforms at Microsoft, explained to the Financial Times: “These [AI] models are going to change the way that people interact with computers. They understand your intent in a way that hasn’t been possible before and can translate that to computer actions.” Talking to a computer as naturally as to a person will revolutionize the everyday experience of using technology, Boyd added.
Recent reports do suggest that a much more consequential team-up is in the works between the two companies. One possibility involves putting OpenAI’s technology in Microsoft’s Bing search engine as well as the company’s widely used productivity programs like Office.
The company has already used OpenAI’s technology in a number of its own products. Its Azure cloud customers have been able to pay for access to GPT-3, a text-generating AI model, since 2021. Dall-E 2—an image generating system that excited the AI world last year—is the base of a recent Microsoft graphic design product called Designer, and has also been made available through the Bing search engine. And finally, Codex—a system that prompts software developers with suggestions of which lines of code to write next—has been turned into a product by GitHub, a Microsoft service for developers.
Microsoft’s AI Future
Of course, an investment of $10 billion into OpenAI is a drop in the bucket for Microsoft, accounting for less than one-sixth of the company’s free cash flow last year. But because of OpenAI’s technology, the potential return is enormous. Much of its tech stems from the creation of so-called large language models, which are trained on huge amounts of text. Unlike the earlier forms of machine learning that dominated AI for the last decade, this technique has led to systems that can be used in a much wider variety of uses, boosting their commercial value.
If Microsoft does go through with the $10 billion investment in OpenAI, it could easily give the software giant a big leg up on its archrival, Alphabet (GOOGL), with a technology that Google itself sees as “a code red” challenge to its cash-cow search business.
However, at the moment, that seems like a stretch. ChatGPT may be able to write coherent-sounding articles. But when you read closely, they are rife with errors, and there are worries that the technology could end up spreading misinformation on a massive scale. That’s why, for example, Stack Overflow, a Q&A website for software developers, has banned ChatGPT, saying its responses cannot be trusted.
At the moment, Microsoft is trying to make a deal with little financial risk. It wants to get the bulk of OpenAI’s profits until it recoups its investment, and the company would own nearly half of this potential AI powerhouse. And any potential deal would further tie the highly data-intensive OpenAI to Microsoft’s Azure cloud service.
You see, processing ChatGPT queries isn’t cheap or easy. OpenAI’s CEO, Sam Altman, prices the platform’s answers at several cents apiece. In fact, on Twitter, Altman said: “…the compute costs are eye-watering.” Analysts at Morgan Stanley estimate that the higher cost of natural language processing means that answering a query using ChatGPT costs around seven times as much as a typical internet search.
As mentioned before, Microsoft’s Azure is providing the vast computing power needed to power OpenAI’s technology. To produce and improve their output, AI systems like ChatGPT need to suck up and process huge amounts of data. Microsoft’s Azure is among the few services that can deliver that kind of horsepower.
Of course, competitors are flocking to the space, with Google and others plowing resources into creating AI models like what OpenAI has created. But since GPT3 stunned the AI world in 2020 with its ability to produce large blocks of text on demand, OpenAI has set the pace with a succession of eye-catching public demonstrations.
If Microsoft is right about the far-reaching implications of generative AI technology, a deal with OpenAI could trigger a complete realignment in the world of AI. OpenAI seems to be the right horse in this race to become the primary platform on which the next era of AI will be built. So Microsoft is positioned to be the winner in the AI field—at least, for now.
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While it is broadly expected that the pace of interest rate hikes may be dialed down to 25-basis points, concerns over terminal interest rates being higher than expected and its effect on the U.S. economy have kept markets on edge.
With the likely less aggressive but drawn-out interest rate hikes by the Fed expected to add further stress to subdued corporate performance, the stock market volatility is expected to continue in the foreseeable future.
Hence, it could be wise for investors to increase exposure to instruments and assets whose prospects are robust enough to remain relatively unaffected by the turbulence.
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With supply constraints due to turbulent geopolitics and extreme weather events acting to keep demand robust, global energy consumption is expected to grow by 1.3% in 2023 as many countries use fossil fuels to manage their energy transition.
Source: https://www.eia.gov/Besides, energy demand is expected to grow in the long run due to increased economic activity and the effects of climate change. The global energy as a service market is projected to grow at a 10.3% CAGR to reach $144 billion by 2028.
Hence, it would be opportune to load up on energy stocks Halliburton Company (HAL), Baker Hughes Company (BKR), and Camber Energy, Inc. (CEI) as some technical indicators point to their upside.
Halliburton Company (HAL)
HAL provides products and services to the energy industry. The company operates through two segments: the Completion and Production segment and the Drilling and Evaluation segment. Over the last three years, its net income and EPS have grown at 13.6% and 12.3% CAGRs, respectively.
During the third quarter of fiscal 2022, ended September 30, due to increased activity and pricing in North American and international markets, HAL’s total revenue increased 38.8% year-over-year to $5.36 billion, while its adjusted operating income increased 84.7% year-over-year to $846 million.
During the same period, the adjusted net income attributable to HAL came in at $544 million, or $0.60 per share, up 119.4% and 114.3% year-over-year, respectively.
HAL’s revenue and EPS for the fiscal ended December 2022 are expected to come in at $20.30 billion and $2.10, indicating increases of 32.7% and 94.4% year-over-year, respectively. The company has further impressed by surpassing consensus EPS in each of the trailing four quarters.
HAL is currently trading at a premium, indicating high expectations regarding the company’s performance in the upcoming quarters. In terms of forward P/E, HAL is presently trading at 20.32x, 149.1% higher than the industry average of 8.16x. Also, it is trading at a forward EV/EBITDA multiple of 11.53, compared to the industry average of 5.50.
The stock is currently trading above its 50-day and 200-day moving averages of $37.79 and $34.05, respectively, indicating an uptrend. It has gained 17.7% over the past month and 50.7% over the past six months to close the last trading session at $42.66.
MarketClub’s Trade Triangles show that HAL has been trending UP for two of the three time horizons. The long-term trend for HAL has been UP since October 20 and its intermediate term trend has been UP since January 6, 2023, while its short-term trend has been DOWN since January 18, 2023.
Source: MarketClub
The Trade Triangles are our proprietary indicators, comprised of weighted factors that include (but are not necessarily limited to) price change, percentage change, moving averages, and new highs/lows. The Trade Triangles point in the direction of short-term, intermediate, and long-term trends, looking for periods of alignment and, therefore, strong swings in price.
In terms of the Chart Analysis Score, another MarketClub proprietary tool, HAL scored +85 on a scale from -100 (strong downtrend) to +100 (strong uptrend), indicating that the longer-term bullish trend is likely to resume. Traders should continue to monitor the trend score and utilize a stop order.
The Chart Analysis Score measures trend strength and direction based on five different timing thresholds. This tool takes into account intraday price action, new daily, weekly, and monthly highs and lows, and moving averages.
Click here to see the latest Score and Signals for HAL.
Baker Hughes Company (BKR)
BKR is an energy technology company that operates through three segments: Oilfield Services (OFS); Oilfield Equipment (OFE); Turbomachinery & Process Solutions (TPS); and Digital Solutions (DS). BKR’s revenue grew at a 6.8% CAGR over the past five years.
For the fiscal 2022 third quarter, ended September 30, 2022, BKR’s revenue increased 5.4% year-over-year to $5.37 billion. During the same period, driven by higher volume and pricing with all segments expanding their margins, the company’s adjusted operating income and adjusted EBITDA increased 25.1% and 14.2% year-over-year to $503 million and $758 million, respectively.
The adjusted net income attributable to BKR for the quarter came in at $264 million or $0.26 per share, up 87.2% and 62.5% year-over-year, respectively.
Analysts expect BKR’s revenue and EPS for the fiscal year ended December 2022 to increase 3.9% and 46.6% year-over-year to $21.33 billion and $0.92, respectively.
In terms of forward P/E, BKR is currently trading at 34.24x compared to the industry average of 8.16x. Similarly, its forward EV/EBITDA multiple of 11.81 is greater than the industry average of 5.50.
BKR’s stock is currently trading above its 50-day and 200-day moving averages of $29.27 and $28.91, respectively, indicating a bullish trend. It has gained 7.9% over the past month and 31.6% over the past six months to close the last trading session at $31.63.
MarketClub’s Trade Triangles show that BKR has been trending UP for two of the three time horizons. The long-term and intermediate-term trends for BKR have been UP since November 1, 2022, and January 3, 2023, respectively, while its short-term trend has been DOWN since January 18.
Source: MarketClub
In terms of the Chart Analysis Score, another MarketClub proprietary tool, BKR scored +75 on a scale from -100 (strong downtrend) to +100 (strong uptrend), indicating short-term weakness. However, the stock still remains in the confines of a long-term uptrend.
Click here to see the latest Score and Signals for BKR.
Camber Energy, Inc. (CEI)
CEI is an independent oil and natural gas company. It is engaged in the acquisition, development, and sale of crude oil, natural gas, and natural gas liquids and manufacturing and supplying industrial engines, power generation products, services, and custom energy solutions.
During the third quarter of the fiscal, ended September 30, 2022, CEI’s revenue increased 53.6% year-over-year to $158.51 thousand. During the same period, the company’s net loss attributable to common shareholders narrowed to $23.28 million or $0.05 per share, compared to $264.56 million or $1.63 during the previous-year quarter.
CEI’s total liabilities stood at $70.60 million as of September 30, 2022, compared to $118.22 million as of December 31, 2021.
CEI’s stock is trading at a premium compared to its peers. In terms of trailing-12-month EV/EBITDA, CEI is trading at 107.02x, compared to the industry average of 1.98x. Also, it is currently trading at a forward Price/Sales of 22.97x, compared to the industry average of 1.38x. It closed its last trading session at $1.90.
MarketClub’s Trade Triangles show CEI has been trending UP for each of the three time horizons. The long-term trend for CEI has been UP since December 21, 2022, while its intermediate-term and short-term trends have been UP since December 19, 2022, and January 20, 2023, respectively.
Source: MarketClub
In terms of the Chart Analysis Score, another MarketClub proprietary tool, CEI scored +100 on a scale from -100 (strong downtrend) to +100 (strong uptrend), indicating that the uptrend will likely continue. Traders should protect gains and look for a change in score to suggest a slowdown in momentum.
Click here to see the latest Score and Signals for CEI.
What’s Next for These Energy Stocks?
Remember, the markets move fast and things may quickly change for these stocks. Our MarketClub members have access to entry and exit signals so they’ll know when the trend starts to reverse.
Join MarketClub now to see the latest signals and scores, get alerts, and read member-exclusive analysis for over 350K stocks, futures, ETFs, forex pairs and mutual funds.
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Best,The MarketClub Team[email protected]
3 Energy Stocks To Load Up On In 2023 Read More »
As promised last week, I want to go back and explore the thesis advanced by KKR’s (KKR) macroeconomics team. Henry McVey and his team suggested that one of the best ways to earn high returns on your money over the next few years is going to be owning companies that are growing their free cash flow and dividends.
That hypothesis is easy to agree with, given that free cash flow and dividends are two of the three legs of my long-term investing trinity.
Here’s why, and two stocks that fit to buy today…
I am a huge fan of free cash flow. After all the bills are paid and the necessary expenditures to keep equipment, facilities, and plants up to date have been taken care of, leftover cash is what is used to grow the business and increase the stock price over time.
(The third leg of the long-term investing trinity, of course, is asset value, but we can save that discussion for another day.)
The first company that is growing its free cash flow and dividends at a double-digit pace also fits into another investment theme both KKR and I think will provide huge returns in 2023. (Judging by how often I find KKR’s thinking aligns with my own, I have to think they have a bunch of really smart people working there…).
Owning infrastructure that moves oil and gas from point A to Point B for a fee will continue to be a great business. These assets throw off high levels of cash.
One of the largest owners of energy-related infrastructure is Kinder Morgan (KMI). Kinder Morgan owns about 70,000 miles of natural gas pipelines that handle about 40% of all natural gas shipments in the United States. The company has pipelines connected to every important natural gas field in the country, including the Eagle Ford, Marcellus, Bakken, Utica, Uinta, Permian, Haynesville, Fayetteville, and Barnett gas fields.
Kinder Morgan also owns another 9,500 miles of pipelines that transport liquids like gasoline, jet fuel, diesel, natural gas liquids, and condensate. This business segment also owns 65 liquids terminals that store fuels and offer blending services for ethanol and biofuels. And, the company is the largest independent terminal operator in North America. Kinder Morgan has 141 terminals that handle renewable fuels, petroleum products, chemicals, vegetable oils, and other products for its customers.
The company will generate over $3 billion in free cash flow for the full year 2022, which will be used to pay dividends, reduce debt and buy back stock. In fact, Kinder Morgan has grown its free cash flow by an average of 20% yearly, and has been generous about sharing that cash with shareholders. As a result, the dividend over the past five years has grown by 19% annually.
This a stock you can buy and hold for a very long time. While oil and gas are its dominant business today, Kinder Morgan is positioning for a green future and will be a big player in renewable infrastructure as the need develops over the next few decades.
Another stock that fits the free cash flow and dividend growth description is Advance Auto Parts (AAP). This company is, obviously, in the auto part business. Currently, Advance Auto has 4,687 stores and 311 branches in the United States, Puerto Rico, the U.S. Virgin Islands, and Canada. The company also services 1,318 independently owned Carquest branded stores in Mexico, Grand Cayman, the Bahamas, Turks and Caicos, and the British Virgin Islands.
Advance Auto has been in turnaround mode for several years, but appears to be getting its act together. Over the past five years, the company has grown free cash flow by 20% annually. In addition to using the cash to improve the business and make smart acquisitions, Advance Auto has also been buying back stock and increasing the dividend, which it has grown by 64% annually for the past five years. The shares currently yield about 4%.
Advance Auto Parts is on my “buy ugly” list. It is the type of stock I want to buy when the market collapses and good companies are trading at ridiculous prices. This company is starting to hit on all cylinders, and management has proven to be very shareholder friendly.
In general, buying companies with growing free cash flows and rising dividends makes a lot of sense in the current market environment. In a slowing economy, companies that can produce free cash flow and use that cash to reward shareholders should be handsomely rewarded by the market.
It’s not REITs or blue chips like Disney. A small, little-talked about area of the dividend stock market is pumping out market-beating returns like no tomorrow. Over 22 years, they’ve handily beat the market… and I have the #1 stock of these to give you now.
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The latest Consumer Price Index (CPI) report revealed that inflation declined for the sixth consecutive month. After increasing 7.1% in November and 7.7% in October, inflation cooled in December to 6.5% compared with a year earlier. While inflation eased significantly, it continues to hover near a 40-year high and is way above the Federal Reserve’s
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Despite logistic difficulties, the fertilizers industry is expected to witness growth due to its steady demand in agricultural production. The worldwide fertilizer market is projected to expand significantly as population growth drives food demand. In addition, the U.S. Department of Agriculture will shortly begin accepting public comments on the environmental and associated aspects of 21
The 2 Best Fertilizer Stocks to Buy for Gains in 2023 Read More »
How does gold and its digital competitor Bitcoin relate to each other?
Gold is a traditional store of value, while Bitcoin from a conventional standpoint is highly risky. Even though the latter was nicknamed “digital gold,” we can see from the chart below that it does not act like one.
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Source: TradingView
In the above quarterly chart, I combined 5 items:
The gold price is in black bars on scale A. The Bitcoin price is in orange bars on scale B. The U.S. money supply indicator M2 (M2) is in histogram on scale C. The red line represents the U.S. real interest rate (RIR) on scale D. There is a 2-year correlation coefficient of Bitcoin to gold (blue) in the sub-chart.
Both prices of gold and Bitcoin were moving higher with the M2 which has shown the extensive work of the “printing press”. The impact of the pumped money supply can be seen clearly in the dynamics of the RIR, which has fallen in the deep negative zone.
Gold has peaked five quarters ahead of the M2 climax point. However, following the repeated attempt to retest the all-time high, the price has nearly reached it, and the top coincides with M2 as well as with the bottom of the RIR.
Bitcoin has hit the all-time high close to the extreme of M2 and bottom of RIR with amazing accuracy.
While the move was in sync, the real reasons behind it were quite different. Gold buyers were trying to save the value of money. Bitcoin enthusiasts used cheap money to take a risk.
When the “printing press” stopped and M2 collapsed, both the top metal and main coin weakened at different speeds. The rapid growth of RIR forced by the Fed has caused more damage to Bitcoin than to gold: -68% vs -22% since the bottom of RIR. This confirms the speculative nature of the main crypto. This is evident in the next chart as well.
The correlation ratio clearly shows all the above-mentioned sync and de-sync periods. Currently, the link is slightly positive because both instruments are growing against the dollar.
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Source: TradingView
In the above chart, I put Bitcoin vs. gold within the ratio (orange bars) and compared it with the gauge of risk represented by the S&P 500 index (blue line).
Since the correlation ratio is almost 0.87, it has mostly been positive over the past three years. The link has been weakening when the more volatile ratio has been falling sharply compared to the index.
The ratio peaked 3 months earlier than the index did at the start of 2022. If we consider the most recent valley as a bottom, then the ratio reached it 1 month later than the index.
There is a big gap between these instruments on the chart that remains stable over the observed period. It closes only when the Bitcoin/Gold ratio strikes new highs with a much larger amplitude than the S&P 500 matching on the chart.
Both instruments have been recovering after a massive sell-off and the stronger ratio could be a harbinger of renewed appetite for risk as the market thinks that the Fed is about to stop tightening.
The ratio has the 12-month moving average (purple) as the strong barrier at 14.5 ounces ahead. The RSI indicator is moving north and it needs to cross over the 50 line to support further growth.
In order to close the gap with the current S&P 500 level it would require a huge gain of almost three times to reach 30 ounces.
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Intelligent trades!
Aibek BurabayevINO.com Contributor
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
Bitcoin VS Gold VS S&P 500 Read More »
In these early days of 2023, I often find myself thinking about how attractive Master Limited Partnership (MLP) investments look as we move into the year. After a great 2022, energy infrastructure companies are poised to perform well again this year. The big choice is whether to invest in midstream MLPs or shares of midstream corporations.
Here’s what I found – and the best investment to make now…
The terms energy midstream and energy infrastructure are interchangeable. These are the assets and companies that provide gathering, transportation, storage, and terminals between the upstream operations (oil and gas drilling) and downstream operations (refining, chemical manufacturing, utilities).
Before 2015, most midstream companies were structured as MLPs. The prevailing business model involved funding growth projects with a combination of equity and debt. The growth generated growing free cash flow, most of which was paid out as distributions to investors. For at least two decades, MLPs were outstanding dividend growth investments.
The energy sector crashed from 2015 through 2018. The debt-heavy MLP business strategy stopped working. The energy sector crash was a period of massive business restructuring among midstream companies. Companies reduced leverage ratios and cut back on distribution payout levels. They transitioned to paying for growth out of internally generated cash flow.
Additionally, many companies chose to restructure into corporations, leaving the MLP sector behind.
Currently, midstream companies are in excellent shape. Leverage is low, and free cash flow is high and growing. Dividends are well covered, with many companies showing more than two times coverage of the distributions paid to investors. The choice for investors now revolves around whether to focus on midstream companies organized as corporations or as MLPs.
Master limited partnerships often get passed over because they send out Schedule K-1 forms for tax filing. Also, if MLP shares are owned inside a qualified retirement-type account, they can cause tax issues.
Let’s compare the relative valuations of MLPs versus corporations in this sector.
First, three of the larger midstream companies are organized as corporations. I want to look at the current dividend yield and the dividend growth over the last year:
Kinder Morgan Inc. (KMI): Current yield: 5.9%. Year-over-year dividend growth: 2.78%.
ONEOK, Inc. (OKE): Current yield: 5.3%. Dividend growth: 0%.
The Williams Companies (WMB): Current yield: is 5.2%. Dividend growth: 3.66%.
Now let’s look at the three biggest holdings of large-cap, representative MLPs on the Alerian MLP ETF (AMLP).
Energy Transfer LP (ET): Current yield: 8.4%. Dividend growth: 73.6%. (Yes, 70% year-over-year dividend growth!)
Enterprise Product Partners LP (EPD): Current yield: 7.7%. Dividend growth: 8.89%.
Western Midstream Partners LP (WES): Current yield: 7.1%. Dividend growth: 54.8%.
Last year, MLPs kicked in the afterburner for dividend increases. I expect the group to continue with high single-digit annual increases. The numbers above highlight the superior return potential of MLPs.
If you want to stay away from K-1s, investing in MLPs through an ETF like AMLP converts their distributions into 1099 reported income. AMLP tracks the Alerian MLP Index. For an actively managed MLP ETF, I recommend the InfraCap MLP ETF (AMZA).
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Bengaluru
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Koramangala
Bengaluru 560034
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