Protected Principal Retirement Strategy: Reallocation - Not Getting Any Easier

by: Akaralph

Okay, the fiscal cliff is solved (not!) and now we move to the next (and more critical) issue - the debt ceiling. Actually, since nothing was really accomplished with the fiscal cliff bill, I thought this solution (here) would make the $16 trillion deficit disappear in a few short days.

Is anyone else as concerned as I about how our government is taking us for a bunch of fools?

I want to go back a few weeks to one of my previous articles (here), and update you as to where I am in the re-allocation process. To say the least, I am frustrated, also concerned about catching the correct entry point for portfolio purchases. There is no sure way to time the markets, so I really don't worry too much about trying to hit low points for buying and high points for selling. Historically, I do pretty well with entries, and less well with exits.

A lot of SA authors save the best for the closing paragraphs of their articles, but let me say upfront that although I now have a more finite list of buy candidates, I am not buying until I have a reasonable idea where things are headed in the stock market.


Our energy portfolio component includes the master limited partnerships [MLPs] and the royalty trusts. As I have mentioned previously, I prefer to overweight the midstream MLPs since they are theoretically least affected by the pricing of the underlying commodities (oil, natural gas and natural gas liquids). My second heaviest weighed MLP sector are the downstream and specialty partnerships.

I reviewed year end data for many of these and in the midstream arena I am looking most favorably at Targa Resources Partners (NYSE:NGLS) and Crosstex Energy (XTEX). Both have increasing distributable cash flows [DCF], coverage ratios of 1.0 or better, and compound annual growth rates [CAGRs] above five percent.

Of the downstream and specialty MLPs, the potential to add to my position in Calumet Specialty Products Partners (NASDAQ:CLMT) remains high. With an increasing DCF, distribution increases, a high coverage ratio (2.3X), and CAGR above eleven percent, I anxiously await a price drop to buy.

In the same asset class, I am watching (and researching) both Northern Tier Energy (NYSE:NTI) and Alon USA Partners (NYSE:ALDW). I will have more on each of these in a forthcoming article. I do not think it would be detrimental to have more than one position in the refining/marketing MLPs.

With regard to the royalty trusts, I continue to hold both Chesapeake Granite Wash Trust (NYSE:CHKR) and Sandridge Permian Trust (NYSE:PER). I am reluctant to add to either position until the quarterly distributions are announced later this month or early February. With Sandridge recently divesting itself of some of its Permian Basin holdings (but not any of the PER properties), there is a chance for some stability and potential upside in PERs price.

I did add a bit to Eagle Energy Trust (ENYTF.PK) in December when the stock price got a little rocky. I received positive reinforcement from their Investor Relations person, and a few days later the company issued a positive press release. I kind of consider ENYTF as a foreign company (Canada), but since their holdings are all in the U.S. I include them in this space.

Real Estate Investment Trusts (REITs)

Prior to the holidays, I closed out my position in Alpine Global Premier Properties (NYSE:AWP), since I had about a 30 percent profit and had no clue how it would react to the fiscal cliff issue. In retrospect I blew it here as AWP now trades about $.20 higher than when I sold it.

I own no mortgage REITs, as I believe they are showing some of the same signs as they did before collapsing in 2008.

At present I am diligently researching several individual equity REITs for possible purchase should the market tank short-term. These include: Whitestone REIT (NYSEMKT:WSR), Omega Healthcare Investors (NYSE:OHI), Medical Properties Trust (NYSE:MPW), Wheeler REIT (NASDAQ:WHLR), Hospitality Properties Trust (NYSE:HPT), and One Liberty Properties (NYSE:OLP). I suggest that anyone interested in the equity REITs read Brad Thomas's articles on SA. I continue to believe that he is at the top when it comes to REIT analysis.

Business Development Companies (BDCs)

We presently hold a position in Medley Capital Corporation (NYSE:MCC), our only portfolio position in the BDC asset class. Since purchasing a few months back, MCC no longer meets all of my evaluative metrics for purchase. The 2012 dividend to earnings per share ratio has moved to 1.09, and the price to net asset value is at 1.16. However, when looking at 2013 earnings estimates, it appears the dividend to earnings per share ratio will drop below 1.00, and prospects remain favorable for additional dividend increase(s).

I intend to establish new positions in both Prospect Capital Corporation (NASDAQ:PSEC) and TICC Capital (NASDAQ:TICC) when the opportunity presents itself.

PSEC's year end metrics show a dividend to earnings per share ratio of on .89, and a price to net asset value ratio of 1.00. TICC's comparables are .99 for the dividend to earnings per share ratio and a 1.03 for their price to net asset value.

Foreign Stocks

I continue to remain pleased with Seadrill (NYSE:SDRL), North Atlantic Drilling (OTCPK:NATDF) and Ship Finance International (NYSE:SFL). Since both SDRL and SFL doubled up on their fourth quarter dividends, I am hoping that each might declare at least a small special dividend for the first quarter of 2013. NATDF has performed fairly well since announcing their forthcoming U.S. exchange listing, and I would expect further increases in their total return.

CEMIG (NYSE:CIG) recently declared and paid a fat dividend ($1.86 USD) in December. My positive opinion on CIG has not changed, and I believe they will be the portfolio's first addition in the foreign asset class, when market conditions dictate.

Closed End Funds (CEFs)

My thinking on the CEFs has not changed at all since the December 13th article, except that I have moved AWP to the watch list for repurchase, and added Blackrock Utility and Infrastructure Trust (NYSE:BUI) for potential new purchase.

BUI presently yields just under 8 percent, holds a wide range of positions in both the U.S. (65 percent) and global markets and its net asset value has been increasing faster than its market price.

With regard to our CEF criteria, BUI presently trades at an 8.5 percent discount to net asset value, the net asset value yield is 7.21 percent, and I do not have information on their fee structure.

How I Determine A Purchase Price

I guess that everyone selects an entry point based upon different criteria. I personally have little use for technical analysis except for trend lines and price gaps, so I usually only give this indicator a passing glance. I do take note of price gaps, as I happen to believe that all gaps are eventually filled.

Most of my buy decisions are based upon obtaining a specific yield (for what it is worth). For instance, when I consider purchasing XTEX, I am looking to placing a limit price at around $12.55 as this would generate a 10.5 percent yield. I think that many investors use relatively even yield numbers (9.0%, 9.5%, 10.0% etc.) as target buy prices. I have no factual basis to prove this, but it seems like buying activity in many of the higher yielding stocks picks up when prices cross these points.

If you want to use a similar methodology for buying, just take the annual dividend or distribution and divide it by the desired yield and you will get your buy price. For example, NGLS closed Friday at $38.34 and the present annualized distribution is $2.65. So if you desire a 7.5 percent yield when you purchase NGLS, divide 2.65 by .075 and you get a buy price target of $35.33. Of course this method assumes that NGLS meets all of our other evaluative metrics.


Since I already mentioned at the beginning of the article that I am not buying at present, I have spoiled the conclusion.

Seriously, I am still very concerned that the 300+ point rally in the market of the other day was a head-fake. Over the past few months, I have been raising cash to about the 15 percent level so that at the appropriate time I can make a few purchases.

When the time comes, I will probably take initial positions in NGLS, XTEX, and possibly ALDW or NTI. Hopefully will add to CLMT and initiate positions in PSEC and TICC.

Disclosure: I am long CLMT, ENYTF.PK, SDRL, SFL, OTCPK:NATDF, CHKR, PER, MCC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article does not constitute a buy or sell recommendation for any of the stocks mentioned.

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