Among the many features found in each week’s Issue of Value Line’s Selection & Opinion report is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization). This data also forms the basis for the Relative Strength price charts found on each industry page in The Value Line Investment Survey

After suffering through painful correction through most of the spring, the market has been making decent progress over the past six weeks. The Value Line Arithmetic Average, for instance, rose 5.3% between June 5th and July 17th. As has been the case for most of 2012, investors seem confident that the U.S. housing sector has better days ahead of it. Related industries grabbed the top three spots in this week’s rankings. Homebuilding led the way with a gain of 28% for the six weeks, followed by Building Materials (up 22%) and Paper & Forest Products (up 15%). 

This week’s top seven, though, also includes one group that has spent most of 2012 in the market’s doghouse. When our Industry Composite Price Performance rankings were compiled in mid-June, the Pipeline MLP Industry was ranked in the bottom quarterile of industries, posting a price change of –5.3% for the trailing six months. Investors, though, have found the past six weeks to be quite rewarding, with the group’s composite price performance showing a gain of nearly 12%. Among those leading the way were Suburban Propane (SPH), Inergy (NRGY), and Enterprise Products (EPD), which racked up gains of 26%, 16%, and 15%, respectively, during this stretch.

As the name would imply, most of the MLPs in the Pipeline MLP group own and operate pipelines. Their operations are located predominantly in the U.S. and typically generate the bulk of their revenues transporting fossil fuels (natural gas, petroleum, etc.). And, despite the industry’s lofty standing in this week’s industry price-performance rankings, the securities of these businesses are usually most prized for their income attributes. The yields on these MLP units range from roughly 4.5% to a shade under 8.0%. 

Meanwhile, MLPs differ from corporations in a number of ways that are relevant to investors. For starters, they don’t pay state or federal corporate income taxes. The resulting implications for unitholders mean that investors should consult a tax accountant regarding these securities. This atypical tax treatment is related to the fact that an MLP typically pays out all of its distributable cash flow to unitholders. Distributable cash flow usually reflects not only reported earnings, but also a variety of noncash expenses, most notably depreciation, depletion & amortization. As a result, distributions frequently exceed GAAP earnings by a sizable amount. Acquisitions and capital spending aimed at expanding (rather than just maintaining the existing asset base) are funded with debt and new unit issues. Not surprisingly then, these businesses tend to operate with a sizable degree of financial leverage, though most get average or above marks for Financial Strength, reflecting their strong and relatively stable cash flows. This, combined with relatively high marks for Price Stability, allows a few Pipeline MLPs to rank Above- Average (2) for Safety.  

The units of Kinder Morgan Energy Partners (KMP) provide a good representation of what the industry has to offer investors. Kinder Morgan Energy is the nation’s largest pipeline MLP. It transports petroleum products, natural gas, and carbon dioxide over a network of roughly 30,000 miles of pipeline and operates 180 terminals. And while cash distributions have consistently exceeded earnings in recent years, the payout per unit has continued to rise at a good clip (about 6% per annum since 2008), thanks partly to increases in distributable cash flow from capital projects, acquisitions, and other investments. The latest quarterly distribution of $1.23 a share represents a yield of nearly 6%. The recent purchase of El Paso Corp. by Kinder Morgan, Inc., which owns Kinder Morgan Energy’s general partner, should provide additional fuel for further increases in the distribution next year. Meanwhile, these low-Beta (0.75) units are among the Pipeline MLP securities that carry an Above-Average (2) rank for Safety, which should add to their appeal with conservative investors.  

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.