CHICAGO, Nov. 25, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Alerian MLP ETF (AMEX:AMLP-Free Report), Baker Hughes Inc. (NYSE:BHI-Free Report), Halliburton Company (NYSE:HAL-Free Report), Alon USA Partners, LP (NYSE:ALDW-Free Report) and Magellan Midstream Partners LP (NYSE:MMP-Free Report).
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.
Here are highlights from Monday's Analyst Blog:
MLPs to Withstand Oil Price Plunge
Energy prices have been on a downward slide for a considerable time now. Prices have fallen almost 30% since June when it experienced its highest prices for the year. The commodity's woes seem to be continuing as prices linger around $80.
Going forward, prices may begin to stabilize. However, a safer way of playing the sector would be to utilize Master Limited Partnerships (MLPs), which offer considerable returns at significantly lower risk.
Higher Returns
MLPs represent an attractive investment option for income-focused investors in the current environment. In addition to high yields, currently ranging from 4%-6%, MLPs are structured as pass-through entities. This means that they do not pay taxes at the entity level and are thus able to pay out most of their earnings to investors.
Since late summer, a selloff was occurring in this security class, which had a particularly bad month in October. The sector benchmark Alerian MLP ETF (AMEX:AMLP-Free Report) usually gains or loses around a dime a day. On Oct 9, it lost 2.4%, before sliding 4.5% on Oct 13. This ended up being the worst week for the sector since mid-2011. But even so, the fundamentals of the asset class remain unchanged. The sectoral ETF provides an indicated yield of nearly 6.1%.
Low Risk
Most MLPs are involved in processing and transportation of energy commodities such as natural gas, crude oil, and refined products, under long-term contracts. As such they have relatively consistent and predictable cash flows, unlike exploration and production (E&P) companies, whose profits are highly correlated with commodity prices.
Like all high income products, MLPs also tend to react negatively to rise in interest rates initially. But research shows there is no material correlation between 10-year treasury rates and Alerian MLP index performance in the longer-term.
One of the reasons is that many MLPs use fixed rate debt for majority of their borrowings. Another reason could be that investors hold MLPs for a long time due to tax consequences and thus they do not have a significant adverse reaction to rising interest rates unlike other rate sensitive assets like utilities and REITs.
Further, MLPs have low correlations with many other asset classes including equities and commodities and thus add diversification benefits to the portfolios.
Our Choices
A harsh winter is getting investors to take another look at energy stocks. Additionally, the sector has witnessed M&A activity with the recent acquisition of Baker Hughes Inc. (NYSE:BHI-Free Report) by Halliburton Company (NYSE:HAL-Free Report). This could spur similar takeovers in the MLP arena, leading to further growth for these securities.
Below we present two stocks which will gain from these trends, each of which also has a good Zacks rank.
Alon USA Partners, LP (NYSE:ALDW-Free Report) refines and markets petroleum products. The company is an integrated downstream business operating mainly in the Southwest of the U.S. as well as the country's Southcentral region. Alon is the owner and operator of a crude oil refinery with aggregate crude oil throughput capacity of around 73,000 barrels per day. The company's products are marketed predominantly in West Texas, Central Texas, Oklahoma, New Mexico and Arizona.
Alon USA Partners holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 37.6%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 5.93.
Magellan Midstream Partners LP (NYSE:MMP-Free Report) owns and operates a diversified portfolio of energy infrastructure assets. The partnership primarily transports, stores, and distributes refined petroleum products and, to a lesser extent, ammonia. In 2013, the partnership's pipeline volumes comprised 58% gasoline, 35% distillates (which include diesel fuels and heating oil), and 7% Liquefied Petroleum Gas (LPG)/aviation fuel.
Apart from a Zacks Rank #2 (Buy), the company currently has expected earnings growth of 36%. It has a P/E (F1) of 24.61x.
Given the current weaknesses in petroleum stocks, MLPs are probably the best method of investing in the sector. They also offer liquidity and tax benefits which add to their appeal. This is why these stocks would make good additions to your portfolio.
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.
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