Part 6: Mid Cap Growth MLP, Mark West Energy Partners—overbought?

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Dec. 4 2020, Updated 10:52 a.m. ET

MLP’s—have retail investors gone too far?

The below graph of Mark West Energy Partners, MWE, reflects exceptional growth against the S&P 400 mid cap index as well as the Morningstar mid cap growth index. This mid cap Master limited Partnership, MLP, has certainly ridden the MLP bull market. Despite the challenges faced by Chesapeake Energy, as noted in the prior article, does this MLP really deserve to have a forward price earnings ratio of 36 versus Chesapeake’s PE of 12? This article considers the prospects of sustaining the stock price rally of Mark West Energy Partners relative to other mid cap growth shares in the context of the current macroeconomic environment.

MLP’s taking a breather?

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Since November 1, 2013, the iShares Russell 2000 growth index, IWF, has been up about 6%, while MWE has declined about 12.0%. Additionally, since mid February this year, IWF is basically unchanged, while MWE is down about 10%. It is possible that MLP’s in general have lost some of their upside momentum.

Rising rates –financing squeeze?

The 5-year Treasury bond has risen from around 0.65% in may 2013 to 1.75% today. Given the economic recovery, it seems likely that the shorter end of the yield curve—from two year to five year could continue to rise. Should this trend continue, ultra low rates supporting MLP debt finance will not last forever. It is possible that growth might offset higher interest levels for MLP’s though refinancing and new financing in a higher and rising rate environment can always be a concern.

Retail investor train wreck in the making?

Additionally, as noted in the prior series on large cap growth MLP, Kinder Morgan, Wells Fargo estimates that 65% of MLP’s are owned by retail investors, which are often contra-indicators of prudent investment timing. Like REIT’s MLP’s have been generating lots of fees for the investment banks who provide the ongoing rounds of debt and equity so that payouts may remain robust. Lets hope main street fares as well as Wall Street in MLP’s in 2014.

The economic outlook—conducive to mid cap growth, or simply speculative froth?

The four recent macroeconomic series noted below have described the US economy in considerable detail, painting a supportive picture for ongoing economic recovery, though also underscoring risks for continued double digit equity returns:

1) US Government Spending: As noted in a prior series on the US macro economy, the US government is back on budget, which has taken some pressure off of deficit spending.

2) Labor Markets: As noted in a prior Series on US employment data, labor markets have picked up dramatically since 2008.

3) US Consumption: As noted in a prior series on consumption data, US consumption is at a good level, though has flat lined since 2012—additional overall consumption growth is not likely.

4) US Investment: As noted in a prior series on US investment data, the investment recovery is in place, though is recovering at a tepid pace, and without improvement in this area, get ready for higher taxes. Implications for equities are mixed.

To see a similar analysis of large cap stocks, please see Will the Fed Take a Bite Out of Apple.

Equity Outlook: constructive macro view

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Despite problems in the Ukraine and China, and despite the modest consumption data in the USA, US labor markets appear to be well into recovery—with the exception of the long term unemployed. From this perspective, it would appear that the US is probably the most attractive major investment market at the moment. While the fixed investment environment of the US is still quite poor, corporate profits and household net worth have hit record levels. Hopefully, all of this wealth and liquidity can find their way into a new wave of profitable investment opportunities, and significantly augment the improvement in the current economic recovery. For investors who see a virtuous cycle of employment, consumption and investment in the works, the continued out performance of growth stocks over value stocks could remain the prevailing trend, favoring iShares Russell 1000 Growth Index (IWF), and growth oriented companies such as Google, GOOG, or Apple, AAPL.

Equity Outlook: cautious macro view

Given the China and Russia-related uncertainties, investors may wish to consider limiting excessive exposure to broad equity markets, as reflected in the iShares Russell 2000 Index, IWM, State Street Global Advisors S&P 500 SPDR and Dow Jones SPDRs—SPY & DIA, and iShares S&P 500, IVV. Accordingly, investors may wish to consider shifting equity exposure to more defensive consumer staples-related shares, as reflected in the iShares Russell 1000 Value Index, IWD, such as Wallmart, WMT.

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