Reflecting on a Dumb Mistake

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Sometimes, with the benefit of hindsight, we just want to kick ourselves. Even though we have done well investing in the last number of years–at least relative to most income investors and when compared to the SP500 or other benchmarks, dumb mistakes have cost us plenty.

We are very conservative folks, but we know that if we want any performance that is above a 3-4% rate that we could achieve with very conservative income issues we have to have some ‘risk’ issues sprinkled into our portfolios. By ‘risk’ issues’ we mean common stocks, REITs,  Master Limited Partnerships (MLPs) and Business Development Companies (BDCs). And it is with this portion of our portfolios that we have trouble with our decision making.

Most recently (actually back in May) we purchased (average price of around $28.50) NGL Energy (ticker:NGL), a very large MLP.  NGL is a midstream MLP. We all know that the upstream companies have been financially hammered because of low energy prices, but we also know that the midstream companies have had relatively decent fundamentals. We learned long ago–I mean a really long time ago (like 40 years) that just because a company has good fundamentals it doesn’t mean the share price will walk in lock step with the fundamentals. In no other sector has this been truer than in the MLP sector. 


Taking a look at a example in the midstream arena we can see just how true the disconnect between share price and fundamentals has been.  For instance Markwest Energy Partners (ticker:MWE) traded as high as $77.31 in the last 52 weeks, but today is trading at $45.44. Just a week ago the company released financials that were almost identical to a year ago (in terms of distributable cash) and they also raised their distribution. Sales were off somewhat, but not disastrous. So fundamentals are hanging in there in a tough environment, distributions have been raised and the share price (or unit price since it is a MLP) tanks by over 40%.  Markwest Energy Partners is now being sold to Marathon for a price somewhat above current levels, but the example remains valid.

NGL Energy Partners is very similar in performance to Markwest Energy—good performance and a distribution that has recently been raised.

There are many, many examples of the disconnect a given sector may experience–and we know that this happens all the time. This is the part that makes us want to kick ourselves.  MLPs are out of favor, and we would be surprised if they come back in favor anytime soon. Our best guess is that this sector will remain out of favor for at least 6 months more–and it could be much longer. Again as a conservative income investor why did we get involved with NGL Energy. The obvious answer is that we thought it had fallen far enough and likely would rebound from our purchase point.  Definitely wrong. In spite of our learnings from 40 years ago we chose to get involved even though the sector is under tremendous pressure–dumb, dumb, dumb.

At this point in time NGL is trading at a price of $16.61 after bouncing from $14.57 a couple days ago. We have 400 shares and will sell it all in the next 2 days. We recognize that some of our readers will think it is best to hold the issue if it is a solid issue, but with our belief that the energy sector and MLPs in particular will be under continued pressure for at least 6 months, there simply is no reason to hold the issue.

Note that stock prices go up and down–no one can purchase only shares that rise in price, but the chances of success are much greater when avoiding sectors that are hated. Sure the reward of a bouncing share price can be substantial, but we have to remind ourselves that we are conservative income investors, not speculators looking to catch a bounce.




Tim McPartland

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Tim McPartland
Tim McPartland is a private investor with over 45 years of investing experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.
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