MLPA - MLPA: A Perceived Beneficiary Of Rising Breakeven Inflation Rates

2023-11-01 13:17:06 ET

Summary

• Breakeven inflation rates in the 5-10-year range have been rising despite weak oil prices.
• Morgan Stanley suggests that energy stocks and tax-favored MLPs perform well in this environment.
• The Global X MLP ETF remains a compelling buy with a strong valuation and resistance to rising market yields.
• I outline key price levels to watch heading into year-end.

Breakeven inflation rates have been on the rise over the last several weeks in the 5-10-year range. The so-called "5y5y breakeven" has ticked from not too far above 2% to near 2.5% despite oil prices that have been weak. I was intrigued to read a note from Morgan Stanley that highlighted how energy stocks and tax-favored MLPs often perform well in such environments.

I reiterate my buy rating on the Global X MLP ETF (MLPA). Its valuation remains compelling, and the fund has withstood the rising market yields better than other income plays lately.

Inflation Expectations in the TIPS Market Inch Higher

According to Global X , MLPA seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive MLP Infrastructure Index. The fund offers exposure to shares of midstream pipelines and storage facilities firms that have less sensitivity to energy prices compared to integrated oil companies and E&P names. It invests in growth and value stocks of companies across diversified market capitalizations.

I have always been concerned about MLPA's concentration. More than 90% of the fund is comprised of just 10 companies. So monitoring fundamental earnings trends and industry issues is particularly important when going overweight this ETF. Over the past 12 months, its dividend payouts make for a yield north of 7%, but overall distribution trends are negative, though 2022 did see a modest positive inflection in the total payout rate.

MLPA: Portfolio Holdings, Dividend Data

As a technician, I like how MLPA has an A momentum rating , according to Seeking Alpha's ETF Grades. The $1.4 billion assets under management fund has a moderate 0.45% annual expense ratio (significantly cheaper than its peers ) and is considered somewhat risky, though volatility has not been all that high in recent months. With daily volume under 90,000 shares, you might be concerned about liquidity , and the issuer notes that the ETF's 30-day median bid/ask spread of 16 basis points can be wide at times, so I suggest using limit orders when trading this vehicle.

MLPA: ETF Metrics & Risk Stats

The two-star, 'negative' rated ETF by Morningstar is heavily allocated to the value style while just 7% of the portfolio is considered growth. Additionally, there is a high amount of small and mid-cap exposure, so there's a high degree of cyclical risk given its factor profile. What's more, momentum is high given the fund's outperformance over recent months, but earnings quality and liquidity are not MLPA's strong suits. With a price-to-earnings ratio barely above 11 and a modest price-to-sales multiple, this non-glamour slice of the equity market continues to feature value, in my view.

MLPA: Portfolio & Factor Profiles

Seasonally, we are getting closer to a better point on the calendar to be long MLPA, according to data from Equity Clock . Shares have historically reached a nadir in mid-December after a June-November downtrend, so this is a bullish indicator as we progress toward the end of Q4.

MLPA: A Bullish Seasonal Turn Ahead?

The Technical Take

Previously, I have assessed the long-term view of MLPA's chart. This time, however, let's zoom into just the past two years. Notice in the chart below that a recent technical development bears watching. A double top pattern at $45 catches my eye, and the light-volume pullback seen in recent weeks has taken some of the upward momentum out of shares. Still, the ETF remains above its long-term 200-day moving average (which is positively sloped - a bullish sign) and there is a high amount of volume by price in the $40 to $44 range - so that should provide some cushion if we see further selling pressure on this yield-heavy ETF.

While there is some bearish RSI divergence ongoing (as seen at the top of the graph), a longer-term uptrend remains firmly intact. Overall, I see support near $43 - a drop below that price point could result in a test of the $40 level which was support on three occasions from late Q4 last year to this past May. A breakout above $45 to $46 may portend a bullish measured move price objective to near $49.

MLPA: Bullish Uptrend Persists, Near-Term Double Top

The Bottom Line

I reiterate my buy rating on MLPA. I continue to like its low valuation and high dividend yield. The chart, meanwhile, is constructive despite a few short-term cautionary signs.

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