October was a reminder for us of why it’s important to diversify.
Apple (AAPL) had a fantastic quarter on expectations of strong iPhone sales, and the company is within striking distance of being the first trillion-dollar company by market cap.
General Motors (GM), also had a great month though it ended on a sour note with negative comments from Goldman Sachs prompting investors to take profits.
But these successes notwithstanding, October was a difficult month for many of other sectors.
Master Limited Partnerships, REITs and alternative investment managers such as Blackstone (BX) and KKR (KKR) didn’t react well to certain aspects of President Trump’s tax reform proposals.
Specifically, in my opinion, companies that routinely use a lot of debt in their capital structures – and MLPs, REITs and private equity firms all most certainly do – might see their ability to write off interest expense curtailed.
I’m not particularly concerned about the proposed tax reforms. To start, these are proposed reforms, and there is still a lot of deal making left to be done.
And, while our government has a long history of making very poor decisions, I don’t think they are dumb enough to pass a tax reform law that will do serious damage to the real estate market, as a cap on interest expense write-offs most certainly would.
In my opinion, tax reform will actually help most of these companies.
Writing for Barron’s, Crystal Kim quoted Credit Suisse analyst Craig Siegenthaler as saying it was probable that tax reform incentivizes Blackstone, KKR and other alternative managers to ditch their complex partnership structures and reorganize themselves as C-corporations.
This, in turn, would likely lead to significantly higher valuations, as institutional investors would then be more likely to embrace the sector.
Even if tax reform doesn’t happen or if it fails to compel the alt managers to reorganize, in my view, these are still very attractive companies to own at this stage of the cycle.
Due to the back-ended nature of private equity returns, I believe we should see very healthy earnings and dividend growth for several quarters to come.
Interestingly, Barron’s – which is usually quite critical of MLPs – also had very flattering things to say about Enterprise Products Partners (EPD) late last month, saying that at current prices, EPD offered both growth and income.
I would vigorously agree.
Enterprise had a disappointing quarterly earnings release and raised its distribution by less than what investors expected, leading the shares to sell off.
In my opinion, however, this is a buying opportunity.