When it comes to mastering the MLP's (Master Limited Partnerships), the notion becomes a lot more manageable since the entire universe consists of only 80 publicly traded companies (err excuse me, partnerships). Breakout guest Doug Rachlin, senior portfolio manager for the Rachlin Group -a unit of Neuberger Berman- manages a concentrated portfolio of "18 of the best" MLPs.
The average yield on the benchmark Alerian MLP Index portfolio is 7%, while the Rachlin portfolio yield is just above 6%. "The yield spread versus the historical benchmark 10-year Treasury yield (at 2%) is very, very attractive," Rachlin says.
While that yield didn't prevent a decline in the recent rout, it definitely dampened it. In Fact, the MLP index is down about 7.2% in August compared to a 12.5% drop for the S&P 500, and that excludes dividends.
The MLP sector is dominated by energy names, which has some investors concerned given the outlook for the economy and weak energy prices. But Rachlin isn't worried. "What we always liked about the MLPs is that they are not commodity sensitive. It's about the volume and throughput of energy products in a pipeline or a storage facility," he says. And even if energy demand declines in a recession (as they inevitably do) Rachlin's MLP picks have long-term contracts that are based on capacity instead. It's like leasing a bus that seats 50 people for a group of 25 at the same price.
Rachlin's first pick is El Paso Pipeline Partners (EPB), which yields about 5.5%. "The average contract life is seven years and is capacity-based... so for the next seven years over 90% of their revenues are accounted for. That makes us very comfortable and allows us to sleep very well at night," he says.
And since pipeline and storage facility MLPs serve leading energy firms and major utilities, Rachlin says they're not totally insensitive to the economy but are insulated to a very good degree.
Another top MLP pick in his portfolio is Penn Virginia Resource Partners (PVR), not to be confused with its former parent Penn Virginia Corp. (PVA). PVA has been slammed by about 35% in the past 30 days compared to PVR's 12% give back, and the S&P 500's 15% retreat.
With his pick PVR, Rachlin says he is "most excited about its new Marcellus Shale natural gas business." He says it's projected to grow from 40 million cubic feet to 850 million cubic feet of production in the next few years. PVR's yield is 8.1%.
Finally, Rachlin says he's long one of the few non-energy MLP's in the form of amusement park operator Cedar Fair (FUN), which he calls "a real sleeper." While its current yield is 2.7%, Rachlin says don't be fooled. The dividend was cut as part of financing an acquisition that doubled its business. He says they have just restructured debt by $50 million and only have 55 million shares out. So that extra dollar - plus another buck promised on top of it are not being factored into the unit price at all. "There's no way the stock is staying at $18 when in 2013 the dividend is going to be $2 higher and yielding 11%. We think it's going to $30," says Rachlin.
If he's right -- free rides for everyone.
If he's wrong, I say we sentence him to 2-years on the Top Thrill Dragster.