Seeking Alpha
Growth at reasonable price, dividend investing
Profile| Send Message|
( followers)  

This is the second article in a series on using adjusted and verified consensus analyst CAGR (Compound Annual Growth Rate of the distribution) projections in building in outperforming MLP (Master Limited Partnership) portfolio. The goal of this series is to help you understand the valuations in the sector. For example, why is Enterprise Products Partners (NYSE:EPD) priced at a lower yield than Kinder Morgan Energy Partners (NYSE:KMP)? Which one is the better value today?

In part one, I provided answers to the following questions:
(1) Where can I find good dividend and distribution CAGR projections?
(2) Is there evidence that CAGRs strongly influence yields?
(3) Is there evidence that higher CAGRs sell at a discount?
(4) Is there evidence that CAGR awareness adds to total returns?

In this article I will focus on:
(5) How volatile are CAGR projections?
(6) How many CAGR projections do I need to gather?
(7) What metrics or attributes should I use to double check a CAGR projection?
(8) Are the CAGR projections accurate enough to use in investment decisions?

In future articles I will focus on:
( 9) If I want and need income from my portfolio in the here and now - can I ignore CAGRs?
(10) What CAGR awareness means to me.
(11) How do I start to use CAGR projections in my next investment decision?
{12} How are price-implied CAGRs calculated?
(13) How can price-implied CAGRs be used in an investment decision?
(14) What are my current CAGR projections - and how are they justified?
(15) What is the evidence that the Yahoo MLP CAGRs are suspicious projections?
(16) When should you not use a "yield plus CAGR" comparison in an investment decision?
(17) How much CAGR is enough?

I strongly believe that all retail investors need to have an acceptable level of CAGR and risk awareness. That perception is based on my valuation theory, which can be stated as: For all income stocks, valuations are based on a yield plus payout CAGR expectation, with significant adjustments for risk.

And before moving on to new business, I should cover on piece of old business. David Fish offers free access to his dividend CAGR projections here at Seeking Alpha. I inspected his projections for the consumer staple stocks in my coverage universe, and found them right on target. I did have a problem with some of his MLP projections. His total coverage universe is huge. His MLP coverage is not. If you like stats, you will love getting your hands on his data. A link to his article that has a link to his data can be found here - in the first sentence of the first paragraph.

(5a) How volatile are CAGR projections? The bad news

When I told the abridged story of MMP and PAA and their returns since 2010 in part three of this series on MLPs, I explained that CAGR projections evolve. Most CAGR projections change over time. And not all change is for the good.

The absolute level of the CAGR is important. But it is the change positive changes in the CAGR projection that has driven big changes in price appreciation. The opposite is also true - decreases in CAGR projections have been the major cause of underperformance. Let's go back to two spreadsheets shown in a prior article, and look at both the price changes since the beginning of 2010 and distribution growth history - but this time I will show my full midstream coverage universe.

Price Changes and Total Returns Since the Beginning of 2012, 2011 and 2010

07-19-1312-31-11Change12-31-10Change12-31-09ChangeDist Growth
CompanyPricePricePricePr+DistPricePricePr+DistPricePricePr+Distsince Q4-09
Large Capped MLPs
BPLBuckeye71.6463.9811.9721.7166.837.2022.5254.4531.5757.4013.51
BWPBoardwalk32.4427.6717.2428.7831.134.2121.1930.038.0332.397.58
EPBEl Paso43.0434.6224.3234.0633.4528.6744.3325.9665.7991.9577.14
EEPEnbridge32.1433.19-3.166.6031.193.0520.1426.8419.7547.159.80
EPDEnterprise63.6546.3837.2445.5641.6152.9768.0331.41102.64129.8721.27
ETPEnergy Transfer51.8745.8513.1324.8351.820.1017.3444.9715.3443.170.00
KMPKinder Morgan86.3184.951.6010.3670.2622.8439.9560.9841.5468.3323.81
MMPMagellan55.2934.4460.5468.7928.2595.72111.2821.66155.26182.2842.96
NSNuStar44.2656.66-21.88-10.2969.48-36.30-20.6056.09-21.095.972.82
OKSOneOK50.7557.74-12.11-5.1539.7527.6743.6231.1562.9290.4331.19
PAAPlains All-Amer56.3936.7253.5762.4131.3979.6496.2126.43113.36140.1325.00
WPZWilliams52.5559.99-12.40-4.3846.6512.6529.1930.6771.34105.1333.46

14.1723.61 24.8741.10 55.5482.85

07-19-1312-31-11Change12-31-10Change12-31-09ChangeDist Growth
CompanyPricePricePricePr+DistPricePricePr+DistPricePricePr+Distsince Q4-09
Small Capped MLPs
GELGenesis51.2928.0482.9292.9226.4094.28111.1618.90171.38202.8341.13
HEPHolly38.1126.8941.7351.9725.4549.7467.3319.9291.32122.0120.13
SEPSpectra45.6531.9642.8351.9932.8538.9653.4929.5754.3876.2625.32
SXLSunco61.9139.4057.1364.6327.86122.22138.5922.30177.62204.8361.27
TCPTCPipelines50.5147.436.4916.3252.00-2.8711.9436.8437.1165.996.85
TLPTransmontaigne43.3233.6028.9340.3036.4118.9836.2327.5357.3688.858.47

43.3453.02 53.5569.79 98.19126.80

07-19-1312-31-11Change12-31-10Change12-31-09ChangeDist Growth
CompanyPricePricePricePr+DistPricePricePr+DistPricePricePr+Distsince Q4-09
G&P MLPs
APLAtlas Pipelines38.8337.154.5213.7024.6757.4078.449.81295.82352.29
ACMPChesapeak48.1129.0065.9074.7528.7767.2281.1028.7767.2282.27
CMLPCrestwood27.8331.74-12.32-2.8027.192.3520.1220.9732.7163.4730.77
DPMDCP Partners53.5147.4712.7221.2637.4043.0760.6429.5780.96111.3516.67
EROCEagle Rock7.3711.65-36.74-25.498.82-16.446.215.7927.2963.51780.00
EXLPExterran30.0020.1548.8863.9226.8611.6930.1222.2235.0165.6411.89
MWEMark West68.1755.0623.8132.5543.3157.4074.8629.27132.90167.4829.69
NGLSTarga52.0437.2839.5950.0733.9653.2471.3924.31114.07148.0734.78
RGPRegency27.7624.8611.6722.7727.261.8318.5420.9532.5162.743.37
WESWestern62.3241.2751.0158.1330.30105.68120.6423.80161.85186.7468.75
XTEXCross-Tex21.8216.2234.5346.6714.4051.5373.338.60153.72193.14

22.1432.32 39.5457.76 103.10136.07

07-19-1312-31-11Change12-31-10Change12-31-09ChangeDist Growth
CompanyPricePricePricePr+DistPricePricePr+DistPricePricePr+Distsince Q4-09
Marine Transport MLPs
NMMNavios14.9114.741.1519.1319.45-23.34-0.7714.790.8141.759.26
MMLPMartin46.2034.4434.1547.5139.3717.3536.7831.4846.7680.593.33
TGPTeeKay43.1033.1729.9442.0137.9913.4530.6326.4762.8396.4318.42

21.7536.22 2.4922.21 36.8072.92

Large Capped MLP Distribution Growth [based on Q2 Distributions]


Distribution/Unit/QuarterPercentage Distribution GrowthAv Growth
Co.2006200720082009201020112012201306-0707-0808-0909-1010-1111-1210-1206-12

BPL0.73750.80000.85000.90000.95001.00001.03751.05006.255.885.565.263.751.202.484.65
BWP0.36000.43000.46500.48500.50500.52250.53250.53258.144.304.123.471.910.000.963.66
EPB0.00000.00000.28750.32500.38000.46000.51000.6200na13.0416.9221.0510.8721.5716.22na
EEP0.46200.46200.47500.49500.50120.51370.53250.54352.814.211.252.493.662.072.862.75
EPD0.44500.47500.50750.53750.56750.59750.62750.67006.845.915.585.295.026.775.905.90
ETP0.58750.78750.86880.89380.89380.89380.89380.893810.322.880.000.000.000.000.002.20
KMP0.81000.83000.96001.05001.07001.14001.20001.300015.669.381.906.545.268.336.807.85
MMP0.28250.30620.33610.35500.36000.38500.42000.50759.785.611.416.949.0920.8314.968.94
NS0.88500.91500.98501.05751.06501.07501.09501.09507.657.360.710.941.860.000.933.09
OKS0.44000.49500.52000.54000.55500.57500.63500.71505.053.852.783.6010.4312.6011.526.39
PAA0.35380.40630.43300.45250.46750.48500.52250.57506.574.503.313.747.7310.058.895.99
WPZ0.38000.50000.60000.63500.65250.71750.77750.847520.005.832.769.968.369.008.689.32

Average 9.916.063.865.775.667.70

Small Capped MLPs [ based on Q2 Distributions]


Distribution/Unit/QuarterPercentage Distribution GrowthAv Growth
Co.2006200720082009201020112012201306-0707-0808-0909-1010-1111-1210-1206-12

GEL0.18000.22000.30000.33750.36750.40750.45000.497536.3612.508.8910.8810.4310.5610.4914.94
HEP0.32000.34500.36750.38750.40750.42750.44750.47756.525.445.164.914.686.705.695.57
SEP0.00000.00000.33000.37000.42000.46000.48000.5013na12.1213.519.524.354.444.39na
SXL0.25000.27500.29830.33830.37160.39830.42750.57258.4713.419.847.197.3333.9220.6213.36
TCP0.57500.65000.70000.70500.73000.75000.77000.78007.690.713.552.742.671.301.983.11
TLP0.43000.47000.57000.59000.60000.61000.63000.640021.283.511.691.673.281.592.435.50

Average 16.079.548.536.155.469.75

G&P MLPs [ based on Q2 Distributions]


Distribution/Unit/QuarterPercentage Distribution GrowthAv Growth
Co.2006200720082009201020112012201306-0707-0808-0909-1010-1111-1210-1206-12

APL0.84000.86000.94000.15000.00000.40000.56000.59009.30-84.04-100.00na40.005.3622.68Infinity
ACMP0.00000.00000.00000.00000.00000.35000.40500.4675nananana15.7115.4315.57na
CMLP0.00000.00000.31500.37000.39000.44000.50000.5100na17.465.4112.8213.642.007.82na
DPM0.35000.46500.59000.60000.60000.62500.66000.700026.881.690.004.175.606.065.837.40
EROC0.00000.36250.40000.02500.02500.15000.22000.220010.34-93.750.00500.0046.670.0023.3377.21
EXLP0.00000.35000.42500.46250.46250.47750.49750.517521.438.820.003.244.194.024.106.95
MWE0.43500.51000.60000.64000.64000.67000.79000.830017.656.670.004.6917.915.0611.498.66
NGLS0.00000.33700.41750.51750.51750.55750.62250.697523.8923.950.007.7311.6612.0511.8513.21
RGP0.22200.38000.42000.44500.44500.44500.46000.460010.535.950.000.003.370.001.693.31
WES0.00000.00000.30000.30000.34000.39000.46000.5400na0.0013.3314.7117.9517.3917.67na
XTEX0.53000.56000.62000.00000.00000.29000.33000.330010.71-100.00nana13.790.006.90NaN

Average 32.68-35.54-9.0354.7421.176.12

Marine Transport MLPs [ based on Q2 Distributions]


Distribution/Unit/QuarterPercentage Distribution GrowthAv Growth
Co.2006200720082009201020112012201306-0707-0808-0909-1010-1111-1210-1206-12

NMM0.00000.00000.35000.40000.41500.43000.44000.4425na14.293.753.612.330.571.45na
MMLP0.61000.64000.72000.75000.75000.76250.76250.775012.504.170.001.670.001.640.823.33
TGP0.46250.46250.53000.57000.60000.63000.67500.675014.597.555.265.007.140.003.576.59

Average 13.558.673.003.433.161.10

It is an over simplification to say that all changes in price can be accounted for in the changes in the perception of forward distribution growth. Still, it is a simplification that works well. It is also a simplification that can give focus to your due diligence. What news and information should be your focus? You will want to find information that would influence any changes in the distribution. That is much easier said than done.

The G&P (gathering and processing) Crestwood (NYSE:CMLP) is interesting. CMLP has had a larger than average change in distributions - but it has significantly under performed in price appreciation. Why? Its current rate of distribution growth is falling - and its CAGR projection has fallen.

Large-cap Magellan (NYSE:MMP) has been the winner in share price appreciation. It is also second place in distribution growth. But the major cause of unit price appreciation is probably the increase in distribution growth and the increase in its CAGR projections from the mid single digits to the current near double digit pace.

Large-cap El Paso (NYSE:EPB) has been the winner in distribution growth - but it has only been average in share price appreciation. Why? With the acquisition of its general partner by Kinder-Morgan, EPB's strong "drop-down" story comes to an end. That has significantly hurt the expectation for continued strong distribution growth. Doing the due diligence to learn this changing story is one key to having a good CAGR projection. EPB's rising distribution/DCF ratio serves to reinforce that story. With the story plus a key growth projection metric, you would have the expectation that the analyst projections are falling. You would also expect that distribution growth inertia would no longer be a good metric to use in projecting forward growth.

You would like CAGRs to be a simple and trustworthy tool. It isn't. You would like CAGR to show more consistency. They don't. You would like your due diligence to easily find factors that are highly likely to influence distribution growth. It's not always easy. Distribution growth is a product of the company doing lots of things right. One has to do a good amount of text based due diligence that supports your data gathered CAGR projection.

(5b) How volatile are CAGR projections? The good news

While there is CAGR volatility or "evolution" - the evolution tends to be slow most of the time. Because the adjustment is slow, there is an opportunity for you to adjust faster than the market adjusts. Even though rising CAGRs are better than high CAGRs, the "risers" do not beat the "highs" by a great martin in most years. There is so much out performance of the "highs" over the "lows", capturing that performance is good enough. Let's look at the data from which I make those general observations.

High CAGRs and Year to Date Returns in 2010:
The following companies had CAGRs of more than 4.5%: APL, EPB, EPD, EROC, EXLP, GEL, KGS, MMP, NGLS, SEP, SXL, WES, WPZ, XTEX and TGP. Their mean price gain for the year is 43.46%. Their mean total return for the year is 49.90% - and 8 of the 15 beat the sector median yearly price gain of 31.64%.
The following companies had CAGR estimates under 4.5%: BPL, BWP, CPNO, DEP, DPM, EEP, ETP, HEP, KMP, MWE, NS, OKS, PAA, RGNC, TCP, TLP and MMLP. Their mean price gain for the year is 26.50%. Their mean total return for the year is 34.45% - and 5 of the 17 beat the sector median yearly price gain.

CAGR Increases and Year to Date Returns in 2010:
The following companies had CAGR estimate increases in 2010: APL, BPL, CPNO, DEP, EPB, EEP, EPD, EROC, EXLP, GEL, KGS, KMP, MWE, NGLS, SXL, WES, WPZ, XTEX and MMLP. Their mean price gain for the year is 40.54%. Their mean total return for the year is 47.51% - and 10 of the 19 beat the sector median yearly price gain of 31.64%.
The following companies did not have CAGR increases: BWP, DPM, ETP, HEP, MMP, NS, OKS, PAA, RGNC, SEP, TCP, TLP and TGP. Their mean price gain for the year is 25.54%. Their mean total return for the year is 33.20% - and 3 of the 13 beat the sector median yearly price gain.

High CAGRs and Year to Date Returns in 2011:
The following companies [weeding out high gainers APL, EROC and XTEX] had CAGRs of more than 4.5%: BPL, CMLP, DPM, EPB, EPD, GEL, HEP, MMP, MWE, NGLS, OKS, SEP, SXL, WES and WPZ. Their mean price gain for the year is 18.25%. Their mean total return for the year is 24.38% - and 11 of the 15 beat the sector median yearly price gain of 8.32%.
The following companies had CAGR estimates under 4.5%: BWP, CPNO, EEP, ETP, EXLP, KMP, NS, PAA, RGP, TCP, TLP, NMM, MMLP and TGP. Their mean price gain for the year is -6.80%. Their mean total return for the year is 0.08% - and 2 of the 14 beat the sector median yearly price gain.

CAGR Increases and Year to Date Returns in 2011:
The following companies [APL, EROC and XTEX excluded] had CAGR estimate increases in 2011: BPL, CMLP, CPNO, DPM, EEP, GEL, KMP, MMP, MWE, NGLS, OKS, SXL, WES, WPZ, NMM and MMLP. Their mean price gain for the year is 15.49%. Their mean total return for the year is 22.05% - and 10 of the 16 beat the sector median yearly price gain of 8.32%.
The following companies did not have CAGR increases: BWP, EPB, EPD, ETP, EXLP, HEP, NS, PAA, RGP, SEP, TCLP, TLP and TGP. Their mean price gain for the year is -5.32%. Their mean total return for the year is 1.09% - and 2 of the 13 beat the sector median yearly price gain.

High CAGRs and Year to Date Returns in 2012:
The following companies [weeding out high gainers APL, EROC and XTEX] had CAGRs of more than 4.5%: CPNO, DPM, EPB, EPD, GEL, HEP, MMP, MWE, NGLS, OKS, PAA, RGP, SXL, WES and WPZ. Their mean price gain for the year is 5.99%. Their mean total return for the year is 12.03% - and 9 of the 15 beat the sector median yearly price gain of -2.62%.
The following companies had CAGR estimates under 4.5%: BPL, BWP, CMLP, EEP, ETP, EXLP, KMP, NS, SEP, TCP, TLP NMM and MMLP. Their mean price gain for the year is -11.90%. Their mean total return for the year is -4.21% - and 3 of the 13 beat the sector median yearly price gain.

CAGR Increases and Year to Date Returns in 2012:
The following companies [APL, EROC and XTEX excluded] had CAGR estimate increases in 2012: BWP, CPNO, DPM, EPD, HEP, KMP, MMP, MWE, NGLS, OKS, PAA, RGP, SXL, TLP and TGP. Their mean price gain for the year is 4.67%. Their mean total return for the year is 11.08% - and 8 of the 15 beat the sector median yearly price gain of -2.62%.
The following companies did not have CAGR increases: BPL, CMLP, EPB, EEP, ETP, EXLP, GEL, NS, SEP, TCP, WES, WPZ, NMM and MMLP. Their mean price gain for the year is -8.64%. Their mean total return for the year is -1.32% - and 5 of the 14 beat the sector median yearly price gain.

There have been significant CAGR increases in one low CAGR MLPs (EXAMPLE: BPL) and CAGR decreases in high CAGR MLPs (examples: EPB, OKS and WPZ). Three high CAGR MLPs entered the year with tiny sub-5% yields after having great 2012's while the sector as a whole fell (MMP, PAA and WES). This results in the stats telling an atypical story this year.

High CAGRs and Year to Date Returns for year to date 2013:
The following companies had CAGRs of 4.5% or more: APL, ACMP, DPM, EPB, EPD, GEL, HEP, KMP, MMP, MWE, NGLS, OKS, PAA, SEP, SXL, WES, WPZ and XTEX. Their mean price gain for the year is 26.93%. Their mean total return for the year is 30.00% - and 10 of the 18 beat the sector median yearly price gain [25.06%].
The following companies had CAGR estimates under 4.5%: BPL, BWP, CMLP, EEP, ETP, EROC, EXLP, NS, RGP, TCP, TLP, NMM, MMLP and TGP. Their mean price gain for the year is 24.45%. Their mean total return for the year is 29.04% - and 7 of the 14 beat the sector median yearly price gain.

CAGR Increases and Year to Date Returns for year to date 2013:
The following companies [which paid a distribution in Q1-10 - a way to weed out APL, EROC and XTEX] had CAGR estimate increases in 2012: BPL, EPD, ETP, GEL, HEP, KMP, MMP, NGLS, PAA, SEP, SXL, TCP, TLP and WES. Their mean price gain for the year is 37.76%. Their mean total return for the year is 40.92% - and 10 of the 14 beat the sector median yearly price gain [25.06%].
The following companies did not have CAGR increases: BWP, CMLP, DPM, EPB, EEP, EXLP, MWE, NS, OKS, RGP, WPZ, NMM, MMLP and TGP. Their mean price gain for the year is 10.14%. Their mean total return for the year is 13.84% - and 3 of the 14 beat the sector median yearly price gain.

(6) How many CAGR projections do I need to gather?

It is my perception that all brokerages have the occasional brain fart. It is just human nature. I am very skeptical of any out of consensus DCF or CAGR projection. That is also true for analyst risk assessments. All brokerages produce multiple out of consensus DCF and CAGR projections.

I believe you need to gather at least three and as many as five. But if your brokerage supplies you with a consensus CAGR projection, then that one source offers two projections. Add the projections from Value Line and David Fish, and you are close to having enough. At this point in time, Wells Fargo is the only brokerage doing this. In some instances, its "street" average projection comes from only one other projection. In those "one only" instances, the street number probably is not a good consensus number.

How do you gather as many as four or five CAGR projections? You have to network. That is not easy. You are surrounded by a world that is lacking in direct stock owners. The data from the Federal Reserve Survey of Consumer Finances:

The overall share of families with any direct stock holdings declined from 17.9% 2007 to 15.1% in 2010 (which is the most recent survey). That percentage of direct stock ownership does not change much, until you surround yourself with the top 10% of income earners. The decline in ownership continued a decrease observed since direct stock ownership peaked in the 2001 Survey of Consumer Finances at 21.3%. For the few household owning stocks - 29.2% owned only one; 53.0% owned 2 - 9; and 17.8% owned 10 or more. For 35.5% of stockholders in 2010, at least one of the companies in which they owned stock was one that employed, or had employed, the family head.

MLP owners will tend to own multiple MLPs and own multiple stocks outside the sector. So you are looking for those who own 10 stocks are more. And from a poll I did on an MLP message board, only 20% of those MLP owners surveyed find analyst reports useful.

In summation - you are looking to network with
(NYSE:A) The 20% who think analyst reports are useful - who are only
(NYSE:B) Part of the 17.8% of stock owners who own 10 or more stocks - who are only
(NYSE:C) 15.1% of the population of households.

Doing the math: 20% times 17.8% times 15.1% = half of one percent. If you succeed at networking, you have to be both persistent and lucky. Only one of those factors is under your control. Good luck in that task. Here is rural Texas; we tell the joke that starts with the question "Why did the chicken cross the road? To prove to the armadillo that IT COULD BE DONE!" I network. You can too. You should also remember that I also use multiple brokerages. Only one of those provides CAGRs. That one source also has "street CAGRs". Add the CAGR projections from Value Line and David Fish - and I have four sources before the networking is even started.

(7) What metrics or attributes should I use to double check a CAGR projection?

There is a strong correlation between the distribution to DCF ratio - or the dividend/EPS ratio in other sectors - and dividend growth. That ratio is a must of have. The current stats on that metric:

Distribution Increases and the Distribution/DCF Ratio in 2013:
The following companies had distribution/DCF ratio under 77% before the Q1-13 distribution announcements: ACMP, EPD, EXLP, GEL, MMP, PAA, SXL, TLP and WES. Their mean distribution gain between Q2-13 and Q2-12 was 13.40%.
The following companies had distribution/DCF ratio over 77% but under 90% before the Q1-13 distribution announcements: APL, DPM, EPB, MWE, NGLS, TCP and XTEX. Their mean distribution gain since Q4-11 was 7.34%.
The following had distribution/DCF ratios more than 90%: BPL, BWP, CMLP, EEP, ETP, EROC, HEP, KMP, NS, OKS, RGP, SEP, WPZ, NMM, MMLP and TGP. Their mean distribution gain since Q4-11 was 3.03%.

Distribution Increases and the Distribution/DCF Ratio in 2012: (Calculation screens out APL, EROC and XTEX)
The following companies had distribution/DCF ratio under 77% before the Q1-12 distribution announcements: EPB, EPD, MMP, NGLS, OKS, PAA, SXL, TLP and WES. Their mean distribution gain between Q4-11 and Q4-12 was 14.57%.
The following companies had distribution/DCF ratio more than 77% but under 90% before the Q1-12 distribution announcements: EXLP, HEP, KMP, MWE, TCP, WPZ and TGP. Their mean distribution gain between Q4-11 and Q4-12 was 6.55%.
The following had distribution/DCF ratios more than 90%: BPL, BWP, CMLP, CPNO, DPM, EEP, ETP, NS, RGP, SEP, NMM and MMLP. Their mean distribution gain between Q4-11 and Q4-12 was 1.97%.

There is a good but inconsistent correlation between forward DCF growth and forward distribution growth. You should verify that this number is in line with the CAGR projection. In most cases, distribution or dividend growth inertia should also be in line with the CAGR projection. The price-implied CAGR (formula to be provided in an upcoming article) should also be in line with your own CAGR projection. On the other hand, when the price implied CAGR is much lower than your projected CAGR, then you are buying an undervalued stock. You need to do a Goldilocks type of search here. You want a price implied CAGR that is high enough to suggest the stock's real CAGR, but distant enough from the real CAGR for that stock to be a bargain.

You are also looking for three other attributes. You would like to find a cost of capital that gives the company an advantage the merits it being one of those MLPs with higher CAGRs. You would like to find a margin story that gives the company an advantage that justifies a higher CAGR expectation. You need to have an awareness of what basins are hot - and that the MLP has a footprint in those basins. You need an awareness of where the bottle necks are, and which MLPs are working to solve that problem. There is a strong correlation between bottle necks and hub spreads. You want to find a growth story in which you can believe.

Some growth stories are easy to find. Some are not. MLP newbies are best served to keep it simple. The MarkWest Energy Partners (NYSE:MWE) growth story can be stated in one word - "Marcellus". It has a strong presence in a hot basin. The Western Gas Partners (NYSE:WES) and Access Midstream Partners (NYSE:ACMP) growth story are also simple - "accretive drop downs from their GPs". The Enterprise Products Partners growth story - huge growth cap ex with a history of making growth cap ex accretive. Not all growth is accretive. Energy Transfer Partners has had acquisition and cap ex growth on steroids, while its distribution growth is in need of Viagra. The growth stories for several general partners is also simple - they own the IDRs (incentive distribution rights) on distribution growing MLPs.

The MLP earning releases are lacking in transparency. Every investor is a victim of the lack of transparency. The conference call conversation has a focus of one small asset after the other. It is hard to see the forest for the trees. This difficulty in seeing the forest is the case for almost everyone. You are going to be lost in the details and the jargon in the beginning. That is the case for everyone. Despite those huge obstacles, I need to have a story that supports the numbers. This relatively experienced MLP investor still loves simple stories.

(8) Are the CAGR projections accurate enough to use in investment decisions?

Let's bifurcate CAGRs into two classes of red and green. A red [or do not use] CAGR projection is from a single brokerage. It has not been justified by the supporting metrics. A red CAGR lacks a supporting story. A red CAGR is not good enough to use in an investment decision. A green [or do use] CAGR projection comes from a consensus of several brokerages or sources that is justified by the supporting metrics and a supporting story. A green CAGR is good enough to use in an investment decision.

The data provided in question 6 goes a long way to answering the accuracy question. But this time I want to use the Socrates approach and answer a question with a question. If you are not using CAGR projections - then what are you using to judge the growth attribute of your next investment?

If you are using simplistic "buy" and "hold" consensus analyst judgments, then you are using a tool that correlates with MLPs that have the better CAGR projections. If you have only purchased "buy" rated MLPs, then you have inadvertently been an investor in higher than average CAGR MLPs. Still - you lack a tool that would help you choose between two buy rated stocks. At least you are probably choosing between two good options. But there can often be huge differences between the CAGRs of two "buy" rated stocks.

When one uses the restriction or limitation of buying only "buy" rated stocks, your odds of beating the sector average is only 50%. On the surface, being average sounds bad. On the other hand, the average retail investor does far worse than sector average. There is one other factor to consider. The returns on a basket of highly rated stocks outperforms a basket of lower rated stocks. The stats:

Ratings and MLP performance in 2013 year to date:
The following companies had buy ratings under 2.249 at the beginning of the year: APL, ACMP, CMLP, EEP, EPD, EROC, EXLP, GEL, MWE, NGLS, PAA, RGP, WES and XTEX. Their mean price gain for the year is 28.67%. Their mean total return for the year is 32.04% - and 8 of the 14 beat the sector median yearly price gain of 26.78%.
The following companies had ratings over 2.249 at the beginning of the year: BPL, BWP, DPM, EPB, ETP, HEP, KMP, MMP, NS, OKS, SEP, SXL, TCP, TLP, WPZ, NMM, MMLP and TGP. Their mean price gain for the year is 18.75%. Their mean total return for the year is 22.23% - and 7 of the 18 beat the sector median yearly price gain.
The best rated MLPs - the companies that had buy ratings under 2.0 at the beginning of the year: APL, ACMP, EPD, EXLP, GEL, MWE, NGLS, PAA, RGP and WES. Their mean price gain for the year is 44.99%. Their mean total return for the year is 48.27% - and 7 of the 10 beat the sector median yearly price gain.

Ratings and MLP performance in 2012:
The following companies had buy ratings under 2.249 at the beginning of the year: APL, ACMP, CMLP, EEP, EPD, EROC, EXLP, GEL, MWE, NGLS, PAA, RGP, WES and XTEX. Their mean price gain for the year is -2.06%. Their mean total return for the year is 4.68% - and 7 of the 14 beat the sector median yearly price gain of -2.62%.
The following companies had ratings over 2.249 at the beginning of the year: BPL, BWP, CPNO, DPM, EPB, ETP, HEP, KMP, MMP, NS, OKS, SEP, SXL, TCP, TLP, WPZ, NMM, MMLP and TGP. Their mean price gain for the year is -3.03%. Their mean total return for the year is 3.93% - and 7 of the 19 beat the sector median yearly price gain.
The best rated MLPs - the companies that had buy ratings under 2.0 at the beginning of the year: APL, ACMP, EPD, EXLP, GEL, MWE, NGLS, PAA, RGP and WES. Their mean price gain for the year is 5.53%. Their mean total return for the year is 12.10% - and 7 of the 10 beat the sector median yearly price gain.

Ratings and MLP performance in 2011:
The following companies had buy ratings under 2.249 at the beginning of the year: CMLP, EPB, EPD, ETP, EXLP, GEL, MMP, MWE, OKS, RGP, WPZ and TGP. Their mean price gain for the year is 8.57%. Their mean total return for the year is 15.03% - and 6 of the 12 beat the sector median yearly price gain of 8.32%.
The following companies had ratings over 2.249 at the beginning of the year: APL, BPL, BWP, CHKM, CPNO, DPM, EEP, EROC, HEP, KMP, NGLS, NS, PAA, SEP, SXL, TCLP, TLP, WES, XTEX, NMM and MMLP. Their mean price gain for the year is 8.19%. Their mean total return for the year is 15.08% - and 9 of the 21 beat the sector median yearly price gain.
The best rated MLPs - the companies that had buy ratings under 2.0 at the beginning of the year: CMLP, EPB, EPD, EXLP, GEL and RGP. Their mean price gain for the year is 0.69%. Their mean total return for the year is 7.22% - and 2 of the 6 beat the sector median yearly price gain.

It is my perception that once the retail investor rules out ratings and CAGRs as criteria for use in stock selection, the alternative methods of selection are worse. You could choose to look up the historical stock price appreciation over the last two to five years - and choose the one that has appreciated the most. But who wants to buy a hot stock only to learn that you are late to the party? You could look up the same data - and choose the one that has appreciated the least. But who wants to own a dead in the water stock?

You could try to get suggestions from your broker. But few retail brokers know MLPs. You could choose to trust your gut. You could choose to borrow the best opinion you can easily find from some single talking head on CNBC or some message board. But if investing were that easy, then we would all be above average investors.

You have already been provided the evidence that CAGR projection influence yields. I would argue that you need a green CAGR projection in order to know if a low yield is justified. And you need a green CAGR in order to know if a high yield is not a "yield trap".

You are being told by me to buy high CAGR options in baskets. Some projections will end in disappointment. The data I have provided indicates that most will not. I believe that one needs a shotgun approach in order to have even better odds on your side.

Can you trust CAGRs? Compared to the alternatives, it is the best tool (when combined with a good risk assessment) to assist you in an investment decision. I know I have an emotional bias in this conclusion. Once you put in the labor to generate all these stats - it is human nature to have a preference in using your home made tool. In the end, it is "your" portfolio and an unfamiliar method. It is up to you to decide to use this method or not. You are the ones free from bias.

I still have more questions to answer and more data to provide. So don't be sold on your answer to that question yet. You already have some idea if this "CAGR awareness" idea makes sense. But your decision may change as the story unfolds.

Today's answer to "EPD or KMP?"

I shouldn't end this article without giving a quick answer to the question posed in the first paragraph. Why is Enterprise Products Partners priced at a lower yield than Kinder Morgan Energy Partners? Despite KMP having slightly superior distribution growth in the last twelve months, the distribution to DCF ratio (69.79% to 95.24%) suggests the EPD is the stock better positioned for forward distribution growth. The better distribution coverage also suggests the distribution for EPD is safer. The bond ratings and bond yields echo EPD's slightly superior safety attribute.

EPD's DCF is projected to grow 11.30% in 2013 and 2.34% in 2014. KMP's DCF is projected to grow 4.40% in 2013 and 5.13% in 2014. So EPD currently has a better DCF growth picture. EPD owns its own IDRs. KMP pays IDRs to its GP.

EPD merits a higher valuation. But with a current yield plus CAGR of 10.91% for EPD and 11.42% for KMP, this metric suggests that KMP is currently the better value by a very small margin. The gap in their yields is too high. EPD is yielding 4.21% while KMP is yielding 6.02%. KMP is also priced with a larger gap in its price implied CAGR to consensus analyst CAGR.

Source: The First Metric MLP Investors Should Know - Part 2