Buying Yield On Thursday's Pullback

Includes: LINEQ, MEMP
by: Bret Jensen

"Bravery is the capacity to perform properly even when scared half to death." - Omar Bradley

As I am writing this the market is posting its worst one day rout since September. The primary cause is an unexpected negative reading in China PMI. Challenges in Argentina & Brazil are not helping sentiment either. As I speculated on early in the New Year, if we have increasing turmoil in our markets the likely cause will be increasing volatility from the emerging markets.

One of ironic things about this market early in the year is some of the worst performing sectors in the back half of 2013 are some of the leading performers so far in 2014. These include real estate investment trusts (REITs), energy master limited partnerships (MLPS) and Gold miners.

I think the strong performance in high yielding sectors can continue as the 3% level on the 10-year treasury yield seems to have become a strong resistance point. In addition, if we do get a significant pullback in equities it will likely be accompanied by a continued decline in interest rates in a "flight to quality" fund flow. This would help high-yield sectors.

I particularly like the high yields available at reasonable valuations in the energy partnership space. Here are two of my favorite high-yield plays in the sector.

Linn Energy (LINE) is a large upstream partnership that produces oil & gas from a well-diversified portfolio of properties with long-lived assets. The stock has gained some 50% since late summer after the shares cratered on the back of a couple of 'hit' pieces in Barron's questioning some of its accounting practices which are standard in the industry. These accusations put its huge acquisition of Berry Petroleum (BRY) in jeopardy and the shares acted accordingly.

However, the SEC has given the company a green light and the acquisition of Berry Petroleum has moved forward and been approved. Linn Energy has received a rash of upgrades from analysts after getting past these "challenges". These include positive changes from Howard Weill & Raymond James.

Even with the stock's recent run, LINE is still down ~15% from highs early in the summer of 2013. The entity provides a distribution yield of 9.6%. Revenue growth is tracking to over 30% gains in FY2013 and thanks to the Berry acquisition, sales should increase by more than 50% in FY2014. Estimates for 2014 have moved up nicely over the past month and think LINE's recent strength continues.

Memorial Production Partners (NASDAQ:MEMP) is another fast growing upstream MLP I own in my income portfolio. Revenues are growing even faster at Memorial than at Linn. Sales will almost double in FY2013 and analysts believe another 50% plus increase is on the cards for FY2014.

The shares pay a distribution yield north of ten percent (10.1%) and the company has made frequent & incremental increases in its payout since coming public in 2011. After breaking even in FY2012, Memorial looks like it will post earnings near $1.85 a share in about to close FY2013. Analysts have another ~15% increase predicted for FY2014.

Both UBS and MLV & Co. put "Buy" ratings on Memorial in the last quarter of 2013 and MEMP has been a strong performer since then. I believe this outperformance will continue provided interest rates do not spike as investors seek yield in what is likely to be a more challenging market in 2014. The shares are attractive at just over 10x forward earnings given its growth profile.

Disclosure: I am long LINE, MEMP. 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.