In case you haven’t noticed, pipeline stocks have gone on an incredible run this year. While the S&P/TSX Composite Index is down 11 per cent since January 1, pipeline stocks are up about 30 per cent on average, driven by a thirst for yield.
Demand from investors has been so heavy that Enbridge Inc. , which operates largest network of pipelines, now trades at price-earnings multiple of 28 times. That’s 40 per cent higher than its 5-year median P/E ratio of about 20 times. And last week, Pembina Pipeline Corp. traded around 16 times forward cash flow, which is a very expensive for this metric.
The skyrocketing sector caught the attention of Doug Rowat, who puts out research and strategy notes for Raymond James. His main point: can these valuations be supported?
“While we believe pipeline stocks should be core holdings in client portfolios, even core holdings should occasionally be trimmed,” he suggested in a note to clients. “For investors looking to take some profits on pipelines and take on more risk, a rotation into other areas of the energy sector (pipelines are energy stocks) may be prudent.”
Not exactly a dire warning to exit the sector, but something to chew on nonetheless. Should markets rebound anytime soon, investors may flee these names in search of growth stocks.