Best Small Cap Stocks To Own Right Now

The market has pummeled master limited partnerships (MLPs) over the past few years due to the impact the oil market downturn had on their operations and business model. Among the hardest-hit have been oil pipeline MLP Plains All American Pipeline (NYSE:PAA) and gas pipeline giant Energy Transfer Partners (NYSE:ETP), both of which have lost more than half their value over the last three years. That persistent slump comes even though their turnaround strategies are beginning to gain steam. While these companies still have some work to do before they’re back on solid ground, both could deliver significant returns as they complete their plans and the oil market continues rebounding over the next few years. That upside potential makes them compelling options for investors with a higher tolerance for risk.

Best Small Cap Stocks To Own Right Now: MPLX LP(MPLX)

The market gave income-seeking investors a gift in June by selling off units of MPLX(NYSE:MPLX), a midstream master limited partnership (MLP). For the month, the pipeline company inexplicably lost about 5% of its value, pushing it down about 4% for the year. Because of that, it trades at an attractive valuation and now yields 7.3%. Those are just some of the factors that make it a compelling income stock to consider buying this month.

A strong foundation

With last month’s sell-off, MPLX now trades for less than 11 times cash flow, slightly below the average of most large MLPs. Adding to its appeal is that the company currently generates enough cash to cover its high-yielding distribution by a comfortable 1.29 times, which is well above average in the MLP space. Meanwhile, the company anticipates that it can maintain more than a 1.2 coverage ratio over the long term.

A close-up of a stack of $100 bills.


Adding further support to the company’s ability to sustain its high-yielding distribution to investors is the fact that it generates very stable cash flow because long-term, fee-based contracts underpin the bulk of assets. In addition, the company has a strong balance sheet backed by investment-grade credit metrics that are near the top of its peer group. These metrics place it among the elite MLPs.

Best Small Cap Stocks To Own Right Now: Marathon Petroleum Corporation(MPC)

There are always going to be a lot of questions whenever a company makes a monumental acquisition like Marathon Petroleum’s pending purchase of Andeavor. The $23 billion deal will make Marathon the largest oil refining and marketing company, but there are, of course, questions about integrating the business and wringing out the $1 billion in operational and revenue synergies that management says it can achieve. Then, there is the fear that the company overpaid.

I can’t put those doubts to rest, but one thing Marathon Petroleum’s management has shown over the past few years is the ability to run an efficient refining operation that churns out lots of cash. Taking over Andeavor and its large refining footprint in the Permian Basin and on the West Coast will give Marathon a lot more optionality when sourcing crude oil and distributing fuel. 

One thing that will be working in Marathon’s favor during this integration period is that it is an incredibly lucrative time to be in the refining business. Today, the price of domestic crude (West Texas Intermediate) sells at a steep discount to the international benchmark price (Brent). Even better, crude oil coming down from Canada (Western Canadian Select) sells at a significant discount to WTI, so companies with the ability to handle these two particular types of crude stand to benefit immensely since they will be able to source these heavily discounted feedstocks. Having ample cash flow will allow Marathon to invest in the integration rather easily while continuing its trend of handsomely rewarding investors with dividends and share repurchases.

There are several things working in Marathon’s favor right now, yet the stock has a price-to-earnings ratio of only 10, which seems more than reasonable even if the refining business isn’t as great as it has been over the past few quarters.

Leave a Reply

Your email address will not be published. Required fields are marked *