Be wary of risk

Maybe the most important conclusion to be drawn from trying to forecast the "when" and discovering the difficulties in that quest actually falls into the "what" category. If deciding when the turn will come is so difficult, and the likelihood of calling that turn correctly is so modest, then the last thing an investor would want to be doing now is reaching for yield by piling on risk.

You can see the potential punishment in going for yield by adding risk in the junk-bond market over the past month or two. Average junk-bond yields hit a record low of 6.14% in September as yield-hungry investors drove up the price of junk bonds. Yields, however, had climbed back to 6.85% as of Nov. 19 as investors decided to sell this asset class to reduce the risk in their income portfolios. That rise in yield is a result of a decline in the price of junk-bonds, so right now, junk bond investors who bought when yields were 6.14% and prices were high are looking at a 10.4% hit to their capital.

Does that mean income investors should resign themselves to low yields like the safe 1.65% offered by 10-year Treasurys right now? That seems almost as unattractive an alternative as loading up on risky income assets. Since investors can't predict the "when" of the turn, they could wind up stuck with a 1.65% yield for quite a long while.

Unusual income plays

I think the solution is to get opportunistic and creative.

In this very volatile market, individual income offerings will get temporarily mispriced by nervous investors. Forget about allocations to entire income-asset classes. Jump on those mispriced assets one by one.

For example, shares of Targa Resources Partners (NGLS) took a pounding from $42.83 on Nov. 6 to $35.96 on Nov. 16 on news that the company would price a secondary stock offering at just $36 a unit. It's typical for secondaries to be priced below the current market in order to attract new money. But in this case, the pricing seems to have been aggressively low, and that took down the stock itself. After all, if you can buy the secondary at $36, why pay $42 for what's already on the market?

What makes this drop a very interesting opportunity is that the capital raised is going to finance an acquisition that takes this pipeline master limited partnership into North Dakota's Bakken shale formation. (For more on this fast-growing oil-producing geology, see my column "Ready for the US energy boom?") Targa is buying Saddle Butte Pipeline's crude oil pipelines and natural gas gathering and processing operations in the Williston Basin for $950 million. The growth potential here is very solid -- oil and gas production climbing in North Dakota, but the region is underserved by pipelines, with 74% of North Dakota crude traveling by (more expensive) truck

Targa, which operates in the Barnett and Wolfcamp areas in Texass' Permian Basin and in Louisiana's Tuscaloosa play, raised its target for 2013 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) by 10% to 15% and kept its projections for distribution growth for 2013 over 2012 at 10% to 12%.

Because of the sell-off on the secondary, Targa Resources currently trades with a yield of 7.2%. I don't see a level of risk in domestic energy pipeline partnerships to make me shy away from that yield. At the moment, I think Targa is simply mispriced, so I'm adding it to my Jubak's Picks portfolio.

That's an example of being opportunistic. Here's an example of being creative.

Income without dividends?

Some of the most interesting income plays right now are stocks that don't pay dividends. Highly leveraged companies with big bills for interest payments are restructuring their own balance sheets to bring down the cost of their borrowing. That lower cost falls straight to the bottom line. Buying the stock of one of these companies won't get you any actual income, it's true. But you do get the benefit of low interest rates.

The most interesting plays like this are in countries where improving economies and government economic policies are bringing down overall interest rates in the market. (Brazil is a good example.) This is especially the case in countries -- such as Colombia and Mexico -- that are being rewarded for sound governance by upgrades to their sovereign credit ratings. In Brazil, take a look at Hypermarcas (trading as HYPE3.BZ in São Paulo), the country's largest consumer health company, which in July refinanced bonds that had paid 113.72% of the interbank rate at 105%, or food processor Marfrig Alimentos (MRRTY), which just raised $543 million in a stock offering to pay down pricey debt. In Mexico, look at homebuilder Urbi Desarrollos Urbanos (URBDF) and global cement maker Cemex (CX), which are both restructuring debt and lowering interest payments.

I think it's too early to give up on income assets -- but it is certainly time to work harder at finding the opportunities this market still offers. We're close enough to the turn in this income-asset rally that you can't just buy assets by the bucket anymore.

Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

Click here to become a fan of MSN Money on Facebook

At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX)

,may or may not now own positions in any stock mentioned in this post. The fund owned shares of Urbi Desarrollos Urbanos as of the end of September. Find a full list of the stocks in the fund as of the end of September on the Jubak Global Equity Fund Portfolio Holdings page.

 

Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

Click here to find Jubak's most recent articles, blog posts and stock picks.

More form MoneyShow.com: