These Things Take Time

I had a fraternity brother who was, perhaps, the biggest Smiths fan (remember…this is circa 1986) ever. If I hadn’t known him better, his room would have resembled a creepy, stalker shrine to the band’s front man, Morrissey…aka…Steven Morrissey…aka…Steve the Nutter. What always amazed me is that my fraternity brother was from a tiny, rural, farming community. Talk about a collision of outliers! The mopeyist of mopey Britpop meets an obsessed fan from an isolated area of the rural south. Before the internet. Before smart phones. Three years later, the Smiths broke up and Morrissey was making mediocre solo records. I’m sure at the time other people were “discovering” the Smiths, but it was too late. It wasn’t relevant. However, it took a little while for the word to spread.

It’s no surprise that financial markets and crappy economies (yes…our economy IS crappy…don’t let anyone tell you differently) take time to realize things: prices are too high and they need to come down, prices are too low and its time to buy. This sector is done, this one’s about to pop, interest rates, everything.

This week the market has been expressing its opinion on a lot of things. Some observers may say it has to do with the bicameral circus debate on the debt ceiling. I don’t buy it. The smart people knew it was bullshit kabuki, political theatre. It was already baked into the cake. Two of the ratings agencies have reaffirmed the T-bond’s AAA rating. If the other downgrades? BFD. Those guys lost just about every ounce of credibility thanks to their brilliant calls on mortgage backed securities and Lehman Brothers.

No. Parts of the market are starting to realize that the Eurozone is a big, fiscal hot mess and that their unified currency is whistling past the graveyard. Face it. The Euro is DOA. It’s just that no one has accepted that fact yet. Well, not everyone. Basically, a major, world currency is going to die a slow, agonizing death. It will take time. And as the Euro and all around it gasp and writhe slowly but surely, it will affect U.S. markets and the economy. Where is Milton Friedman when you need him? Fiscal shock therapy stat! But this storm has been brewing for a couple of years but now the market is starting to wake up.

It’s taken a while for the market to realize that rates aren’t going higher any time soon so utility stocks make some sense. Never mind that most pay dividends that exceed the Ten Year and that, as a group, they outperformed the broader market during the hell of Q4 2008 – Q1 2009 and have underperformed since then. The utility average is just starting to show some signs of life. Yes. I am saying that utility stocks are a good place to be as we stare into the face of uncertainty. But, then again, when do we NOT do that on a daily basis?

Yes, dear reader, these things take time. How soon is now?
Well…let’s perk up and meet this week’s three lil’ piggies.

“Cooking with gas…”

Suburban Propane Partners LP (SPH)
Recent Price: 44.36
P/E: 14.16
Current Yield: 7.69%

The Skinny
A while back, we wrote about the energy MLP market being overpriced. We still hold that belief. Many of the more widely held names are still stupidly high. However, SPH looks interesting. Shares are nearly 24% off of their 52 week high, pushing the yield up north of 7%. SPH has raised its quarterly dividend for 19 consecutive quarters. Operationally, the company has been improving efficiencies through chucking low margin businesses and shrinking its fleet. Debt has shrunk over the past few years, too. All in all, SPH is worth a look.

The Danger
As commodity prices have softened, so have MLP prices. Like we’ve said time and again, we think MLP’s have been way over hyped and when a group that has been bid up falls out of bed, it usually does so collectively. SPH shares are scraping on their 52 week low which can always go lower. Energy distributors always run weather risk: too hot, not cold enough, etc. This will always monkey with revenues. And, always remember, MLP’s send out K-1’s…as if the tax code wasn’t screwed up enough?

“Driving a convertible through a crappy neighborhood…”

Beazer Homes USA Convertible Preferred 7.5% (BZMD)
Recent Price: 15.51
P/E: NA
Current Yield: 12.08%

The Skinny
Yeah…we probably are a little bit insane. But, remember how a convert works: converts to shares of the common. Rises and falls in sympathy but pays you more. A chart of Beazer’s common (BZH) resembles the EEG of a ham sandwich. Trades around 2.58. We’re not sure what parity on the convert is. I wouldn’t plan on holding it to conversion. But, if you feel lucky, clipping a 12%+ coupon on a two dollar stock may not be a bad trade. There are some that think the housing famine has bottomed. If so, a two dollar stock of a homebuilder could move taking the convert with it.

The Danger
Other than buying a three cent stock of some on line, biotech company that claims they grew an ear on a mouse’s back, BZMD is about as speculative as it gets. A decade worth of housing supply? Doesn’t bode well for any homebuilder and that includes publicly traded ones. I don’t think I need to prattle on. You’re an adult. Be careful. You can and will lose money.

“South of the border yield…”

Mexico Fund (MXF)
Recent Price: 26.20
P/E: NA
Current Yield: 13.38%

The Skinny
Haven’t talked about a closed end fund (CEF) in a while, so, here ya go! Shares trade at a 7.16% discount to NAV. Just the way we like it. The 10yr average return has been 15.76%. Not bad for a fund that that focuses on what at times appears to be a narco-terror state that is always on the verge of coming apart at the seams. The fund doesn’t appear to use any leverage which is refreshing. Most of the income comes from return of capital. Looks like those guys are doing their job.

The Danger
Well, have you seen the news? Pretty scary down Mexico way. They have to use the Mexican army…the FREAKIN’ MEXICAN ARMY..like the one that went after Butch and Sundance..to combat the narco terror that currently grips the state. It’s starting to make the days of Pablo Escobar and the chaos in Colombia look like a church picnic. Can’t be good for business. Also keep in mind that is the global economy slows, things are exacerbated in volatile emerging markets (although..doesn’t it seem like Mexico has been emerging since Texas declared their independence? Just sayin’) Also, Mexican companies are usually as corrupt as the government. That eventually shows up in the stock and if you own shares of the fund and the fund owns the stock…blah…blah…blah.

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