An Opportunity to Buy Resilient, Income-Generating Stocks at a Huge Discount

What a difference a year makes…

This time in 2015, shares of the Energy Select Sector SPDR ETF (NYSE: XLE) traded for around $70… and were in a free fall.

[ad#Google Adsense 336×280-IA]Over the next six months, they only dropped further.

This popular ETF contains a basket of oil and gas stocks including Exxon Mobil (NYSE: XOM), ConocoPhillips (NYSE: COP) and Kinder Morgan (NYSE: KMI).

Some view it as a proxy for the entire fossil fuel energy sector.

So when the fund bottomed on January 20 at $51.77, investors breathed a well-earned sigh of relief.

As you can see, the good times have continued.

On Friday, shares hit $68.43. That’s within 5% of last year’s high.

The question now is…

As energy continues to rebound – make no mistake, we still have a long way to go – where can you get the biggest bang for your investment dollar?

For my money, it doesn’t get better than midstream pipeline master limited partnerships.

Pipeline MLPs receive revenues based on the volume that goes through their pipes. But their bottom lines are virtually unaffected by the prices of those products. So the current cost of crude or natural gas doesn’t matter.

And yet… most MLPs closely follow the movements of the Energy Select Sector SPDR ETF.

That means investors now have the opportunity to buy resilient, income-generating stocks at a huge discount.

I set out to find the best bargains, focusing on the 56 MLPs involved in midstream oil and gas.

I’ll walk you through my process.

For starters, I wanted to eliminate MLPs that have fallen on hard times. (Resilient or not, no energy company was 100% immune from the recent rout.) So I considered only those with quarterly year-over-year EBITDA growth of 10% or more.

[Editor’s note: EBITDA stands for earnings before interest, taxes, depreciation and amortization.]

That left me with 24 companies. From there, I wanted only the stocks with ample upside. So I researched only those selling at a 30% discount or greater to their 52-week highs. I found three:

  • Columbia Pipeline Partners L.P. (NYSE: CPPL)
  • Energy Transfer Equity L.P. (NYSE: ETE)
  • And MPLX L.P. (NYSE: MPLX).

Since Columbia Pipeline Partners is currently in the process of being acquired by TransCanada Corporation (NYSE: TRP), I removed it from the list.

On to Energy Transfer Equity. It’s a big midstream MLP with a number of subsidiaries. It owns and operates more than 71,000 miles of pipelines, transporting crude oil, refined products, natural gas liquids and natural gas all over the United States.

Energy Transfer Equity has a handsome distribution yield of 6.71%. And it’s currently trading 45% below its 52-week high. With a very reasonable P/E of 14.69, this is a great value stock.

Lastly, let’s check out MPLX L.P. This midstream MLP is developing energy infrastructure assets in the Utica and Marcellus shale plays. Its infrastructure supports Marathon Petroleum Corporation (NYSE: MPC).

Over the last two years, MPLX has experienced significant growth. It also just bumped up its quarterly distribution to 5.99%.

MLPX is currently trading at a 42% discount from its 52-week high.

It’s a good choice too.

As you can see from our simple search, right now there are plenty of good and even great buys in the energy space. You just have to do a little research to find them.

Good investing,

Dave

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Source: Investment U