March was another good month for the MLP Profits Portfolio. The 23 Conservative, Growth and Aggressive Holdings are now up an average of 20 percent thus far in 2013.

The first quarter marks a return to master limited partnerships’ (MLP) dramatic outperformance of other stocks during the bull market that began in March 2009. The Alerian MLP Index has returned 219 percent since the low. By contrast, the S&P 500 is up 10 percent for the first three months of 2013 and 126 percent from the bear-market nadir.

The only MLP Profits recommendation underwater thus far this year is PVR Partners LP (NYSE: PVR), which has been weighed down by weaker-than-expected coal-mining royalties. Even at this MLP, however, management has continued its string of eight consecutive quarterly distribution increases, in anticipation of a stronger 2013.

If the strength of our Holdings’ fourth-quarter results and positive guidance is any guide, none should have any problems producing healthy cash flows this year. That means more distribution growth, even at companies currently challenged by weakness in natural gas and natural gas liquids (NGLs) prices and record regional price differentials for oil.

Rather, our biggest risks now are valuation-related. Not only has the Alerian MLP Index now tripled its bear market low of 145, reached Nov. 21, 2008. It’s nearly 50 percent above the pre-bear market high set back in 2007.

Price inflation has been by far the most pronounced among energy midstream MLPs, particularly those most grounded in the reliable revenues of fee-based businesses. Conservative Holding Genesis Energy LP (NYSE: GEL), for example, has surged more than 50 percent since early November 2012. Its units now yield barely 4 percent.

More recent Portfolio addition Oiltanking Partners LP (NYSE: OILT) currently yields barely 3 percent after soaring 44 percent from my Nov. 7, 2012, recommendation. The MLP it replaced in the Conservative Holdings–Sunoco Logistics Partners LP (NYSE: SXL)–has done nearly as well, returning 28 percent over that time.

Just a few months ago, many were questioning Buckeye Partners LP’s (NYSE: BPL) long-run staying power. Since the first of the year, however, it’s been our top-performing Portfolio recommendation, as investors have stopped worrying about distribution safety and started focusing on a planned return to dividend growth later this year.

Valuation Risk

The negative here is that all eight Conservative Holdings are now trading above buy-under targets. New investors are therefore faced with three choices: wait for a pullback; buy at record highs and risk a downward shift in momentum; or look for something with greater risk but that’s fairly priced.

Whereas Conservative Holdings are fee-focused, Growth Holdings have a bit of commodity-price exposure. For some, such as Linn Energy LLC (NSDQ: LINE) and, to a lesser extent, Eagle Rock Energy Partners LP (NSDQ: EROC), it’s from actual production. For most it’s from operating midstream assets that depend on margins rather than fixed fees.

Whatever the case, cash flows of eight of the nine Growth Holdings–including closed-end mutual fund Kayne Anderson Energy Total Return Fund (NYSE: KYE)–are affected to a greater extent by shifting commodity prices than are Conservative Holdings.

That means greater risk to cash flow and distribution growth, though also more upside both from higher yields and the ability to profit faster when energy patch growth accelerates.

Price inflation has been considerably lower with this group. Nonetheless, most are trading above our recommended prices. That now includes Energy Transfer Partners LP (NYSE: ETP), despite the fact that we’re still waiting for the long-promised resumption of regular distribution growth.

So again, investors are left with the choice of waiting or buying in at prices that reflect increasingly stretched expectations rather than current value.

Aggressive Holdings are chosen because they do have commodity-price exposure. And, not surprisingly in a market that’s shunning what it perceives as risk, there are considerably more recommendations here trading below buy-under targets than Conservative or Growth Holdings.

The tradeoff, of course, is greater risk in an environment where Europe is mired in recession, China may turn to fighting inflation and austerity’s bite has yet to be truly felt in the US.

We set buy-under targets at levels that reflect two things: reliability of distributions and growth, as measured by the strength of the MLP’s underlying business, and value, as gauged by yield and prospective distribution growth.

There’s nothing that says an MLP’s price must fall just because it trades at a high price. The reality is both buying and selling momentum can go on for a long time beyond where it makes any sense from a value standpoint.

The higher a stock rises in a short period of time, however, the more dependent it is on momentum that will turn if market emotion does.

Investors may bid Genesis Energy up to a level where it yields just 3 percent. But if that MLP does anything to disappoint, the price will come right back down again, and almost certainly a lot faster than it went up.

No Final Top, But…

I’ve written many times that we’ll know a final top in MLPs when managements start building projects in anticipation of customers rather than locking in contracts beforehand.

Despite the excitement over the enormous potential of shale discoveries in North America, we’re still seeing MLPs postpone projects if they can’t lock in business beforehand, for example ONEOK Partners LP’s (NYSE: OKS) Bakken Express. We’re simply not there yet.

On the other hand, there are plenty of potential catalysts to knock MLPs down 15 percent to 20 percent, from concerns about rising interest rates to possible new environmental regulation. Any threat to distributions is proven poison to MLP’s unit prices. But even a slowdown in distribution growth–or the issue of equity to fund growth–can do damage at these prices.

I do raise buy-under targets over time with distribution growth. And it’s my full expectation that Portfolio MLPs will at some point be worth far more than even their current prices.

At this point, however, the best course for investors is patience with a sector that’s come a long way in a hurry. Longtime holders may want to consider taking some money off the table in the biggest winners. New investors can take a stab at new Conservative Holding and April Best Buy Boardwalk Pipeline Partners LP (NYSE: BWP) as well as fellow April Best Buy Teekay LNG Partners LP (NYSE: TGP).

Whatever you do, avoid the temptation to throw caution to the wind. There are still values in the MLP universe. But we’ve come a long way since the Alerian MLP Index bottomed in late 2008.

And this is a market where price momentum and the emotions that fuel it can shift in a hurry.

In This Issue

It seems like only yesterday taht MLP Profits Portfolio Holdings finished reporting fourth-quarter and full-year 2012 numbers. But earnings season for the first quarter of 2013 gets underway later this month. Here’s what to look for from our Holdings. See Portfolio Update.

The analyst community is circumspect on one of this month’s Best Buys. The unit price of the other, meanwhile, has been held back because of skepticism about the broader tanker industry. We can scoop them up and lock in attractive yields on solid businesses. See Best Buys.

Distribution growth–or lack thereof–determines the long-term trajectory of a given master limited partnership. But there are subtler, technical factors that impact short- and medium-term price movements. See In Focus.

The last six months has seen a surge in master limited partnership initial public offerings. Here are 10 new issues we’re adding to the MLP Profits How They Rate coverage universe. See Sector Spotlight.