Cleaning Up the 2015 Blended Income Portfolio
By: Tim McPartland,
It is wise to take a few minutes from time to time to identify problems and weaknesses in a portfolio.
This year certainly has been a tough one on income investors, but that is no reason to neglect standard porfolio maintenance. In fact, times such as now behoove investors to review their holdings to weed out the issues no longer worth holding.
For us, that means we have to clean up poor purchases. We hate to “trade” but, as we have written about before, there are some issues that should never have been purchased by investors who have strong conservative leanings toward safety and security.
It was only a couple of weeks ago that we determined we should jettison MLP NGL Energy (ticker: NGLS) from the 2015 Blended Income Portfolio because it had performed so poorly in spite of fundamentals which, while soft, were outperforming many similar midstream MLPs. After reading some feedback from our readers, we reconsidered and determined that we would keep the issue in spite of our reservations about the immediate financial future of the entire energy complex. While the immediate outlook for NGLS is in doubt, the future should brighten, assuming we have a reasonable recovery in energy in the next 12 months.
We also had written a couple of months ago about our personal tendency to buy “experimental” security positions so that we could keep our eyes on new concept companies. It was a bad idea when we bought some of those issues and it continues to be a bad idea to hold some of these issues. It also is a bad idea to hold these issues because we are questioning the ability of these companies to survive and thrive long term. In particular, the two issues we are alluding to are REIT CorEnergy Infrastructure (ticker: CORR) and MLP 8point3 Energy Partners (ticker: CAFD).
CorEnergy Infrastructure primarily owns oil and gas pipelines and gathering systems. While this in itself is not necessarily bad, the quality of some of the leesees is of particular concern. Ultra Petroleum (ticker: UPL) and Energy XXI LTD (ticker: EXXI) lease 67% of CorEnergy Infrastructure’s assets — this is a huge concern to us and it should be to any holder of shares.
While there are long-term contracts on these CORR assets, if a leesee were to undertake a bankruptcy filing, there would be, at a minimum, disruption of cash flows. While the contracts may protect CorEnergy to a large degree, there should be no doubt that the cash-flow disruption would portend substantial damage to CORR’s share price. That share price already is 30% below its 52-week high and 20% below our purchase price. To continue to hold this issue would be foolish. As a result, we sold these shares.
8point3 Energy Partners (ticker: CAFD) is a holder of solar energy assets and is organized as a Master Limited Partnership (MLP). We have to admit that solar energy is an alluring investment to us. But in hindsight, we believe that solar technology remains too expensive to reach the critical mass that will be needed to become nicely profitable. There is no doubt that the cost of solar energy has come down sharply, but it remains a pricey option for those looking to be “green.”
Even though solar is a “fun” technology, when or if the global economy falls into the next full recession, solar projects likely will be unable to garner the capital needed to continue their build out. While we have listed the negatives to holding this security, we might well be wrong — many times we are (as long-time readers know). Nonetheless, we have sold these shares.
The last issue we need to address at this point in time is whether the risk/reward is adequate to convince us to continue holding the baby bonds of Star Bulk Carriers (ticker: SBLK). This is an 8% issue which was issued last November and has a maturity date in 2019. This is a case of stretching for yield — we have been negative on the dry bulk shipping companies for years (literally), but we were able to convince ourselves that the involvement of Oaktree Capital Management, a large U.S.-based asset manager that owns about 52% of the common shares outstanding, would be helpful from a management perspective.
Unfortunately, even Oaktree can’t solve a bulk shipping market capacity glut that is continually made worse by companies looking to survive. Capacity continues to rise while the global economy weakens. While it is certainly true that one must order ships years in advance of putting them into a fleet, it seems highly questionable to continue to build fleets that are certain to be underutilized.
SBLK has a balance sheet that most dry bulkers would kill for — lots of equity and more than $200 million in cash on hand. Does a great balance sheet outweigh the fact that the company has 25 new ships on order? Does it outweigh the fact that charter rates for the dry bulk shipping sector are stuck at a very low level with little outlook for improvement in the next 12 months? We don’t think so.
The SBLK bonds have bounced to the $15 area after cratering to a low of $12.86 after a poor earnings release. Given the outlook, we will sell these baby bonds in the next week.
With these sales, we generate more than $12,000 in cash, which we will simply put in a “cash” account. This move takes the cash position in the 2015 Blended Income Portfolio to more than 18%. We consider this level of cash holdings to be too high. But given the potential Fed Funds rate increase in December, it would seem foolhardy to invest this cash at this point in time. We will be looking to invest a chunk of the cash holdings after the Federal Open Market Committee (FOMC) meeting on Dec. 16.
To that end, we will be writing about where to invest next in the income markets.