JotCast | 1/27/22 Capitalist Times Live Chat

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1/27/22 Capitalist Times Live Chat

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Roger Conrad

3:08

Hi Roy. I think this is both a case of one size doesn't fit all when it comes to numbers, as well as why you need to be careful about what numbers you use when evaluating a company. Breaking down Algonquin, it has three basic businesses: Liberty Utilities, which after the acquisition of American Water Works' New York operations contributes about 80% of earnings, contract renewable energy (north of 15%) and investments chiefly a roughly one-half ownership share of Atlantica Yield. About 90% of income is in US dollars and the rest is mostly Canadian. That's a lot of complexity but it adds up to ROA of 4.2%, ROE of 12.3% and ROC (return on capital) of 6.3%, which along with a sub-50% payout ratio compare favorably to other utilities. Numbers change and AQN doesn't plan to release Q4 results until early March. But as of Q3, adjusted net earnings grew 11% per share, FF0 increased 15% and EBITDA rose 27%, so they are clearly earning a good return on acquisitions at least to date.

Roger Conrad

3:11

One more note on Roy's question on the Enron comparison, one huge difference is Algonquin is 100% asset based earnings, with most coming from utilities that are monitored closely by regulators. There is no energy trading or other operations where numbers can be massaged--which was basically all of Enron's numbers.

3:22

Roger, I am considering adding to one or more of the following; CMCSA, VZ, IDA, D or UNP. Do you have a favorite?

Roger Conrad

3:22

Hi Al. I really liked what I saw in Q4 results and guidance for Comcast Corp and Verizon. It obviously received mixed reviews on Wall Street--but I think the reason for that is some analysts have made up their minds that broadband and wireless growth is going to stall in 2022, and until/unless it becomes clear they're over-worrying about it they're going to view every number they see through the prism of that theory. My view is there was little to indicate a meaningful slowdown in actual numbers reported or in anything said by management. I'll have more specifics in the February CUI issue Utility Report Card comments, as well as the text. But I think either stock would make a great addition. I think IDA and UNP are high quality but have gotten a bit expensive. But Dominion looks like a buy in advance of Q4 numbers on Feb 11.

James

3:27

Elliot-Do you think we will get a bounce in QQQ and ARKK and what price points do you think they will bounce to before topping out? Or does history show that once the top is in, these technology growth stocks like these go straight down with small to no bounces? I got the alert for QID and SARK but with huge shorts and fear in the market, I wonder if a powerful multi-week short covering rally to wipe out the shorts would be a safer time to enter? The risk is if we don’t get the bounce, we get wiped out on our longs that don’t have a hedge.

Elliott Gue

3:27

The best corollary I think is year 2000, the last time growth was so expensive. Back then, the Nasdaq sold off sharply from March to May, bounced into August-September and then entered a bear market that persisted into 2002 and saw an 80% decline. Importantly, while the Nasdaq 100 rallied about 35% from its closing low in May 2000 to its closing high in August, the index never came close to regaining its March 2000 peak. The S&P 500, however, saw a much shallower correction and then retested its March highs over the summer. Remember, the biggest short-term rallies always come in bear markets, NOT bull markets. So, I do think bounces could happen at any time and some of them could last for weeks; however, I'm increasingly of the view that parts of this market have already peaked (mainly the Nasdaq). Even more speculative things like ARKK peaked nearly a year ago and, in my view, could end up declining 80% to 90% from their 2021 peaks.

Elliott Gue

3:27

Now, as to how to handle this I think it depends on your time frame and strategy. In the longer term investment service, I manage we recommended QID (basically short Nasdaq) and SARK (Basically short ARKK) in early December and have added to that position on the recent bounce (that started earlier this week). I see these inverse ETFs as a hedge for our other portfolio recommendations. Generally, from an investing standpoint, it's really difficult to time "bounces." In the trading services -- CT Trader and Elliott's Income Options -- we are a bit more nimble -- I recommended taking partial gains on some short positions -- selling some QID in CTT for a profit and rolling/adjusting our put option exposure in names like SNAP for Income Options. We recommended doing this into extreme weakness to book some gains. However, given just how weak this bounce has been, I am actually looking to "reload" our short exposure soon. Basically, our strategy for the trading services is to retain somnne short exposure and trade..

around these positions by booking partial gains on deep sell-offs and then reloading shorts on the bounces.

das555

3:28

Crestwood Energy Partners was included in your "best six" for 2022. EPD was not included. For a conservative investor would you prefer CEQP to EPD?

Roger Conrad

3:28

I like them both very much. They're high quality companies that have adapted well to the tepid midstream volumes environment. They have earnings momentum, which Enterprise should show on Feb 1 with its Q4 results and Crestwood should on Feb 22. They're still priced at the same level they were when oil was at $50--even after solid gains last year. And EPD has more than doubled its dividend growth rate while CEQP looks set for its first boost since Jan 2019. Crestwood was one of my three picks--along with Rattler and Energy Transfer LP. But I'm definitely not recommending dumping Enterprise to buy Crestwood. Also, Crestwood has a quality rating of "Aggressive" versus EPD's "Conservative."

Gary

3:36

When are you anticipating that the nuclear power industry will have to step back with new contract buys for uranium again. Any preferred uranium companies?

Elliott Gue

3:36

In my view nuclear power has a future and, eventually, some countries that have talked about retiring their plants will have to give that "plan" a rethink. Honestly, I don't know how to characterize Germany's decision to retire all its plants as anything other than a complete and total disaster. Hopefully the French will continue to resist calls to follow suit on that one. The problem is that my read of the market here is that there's adequate supply right now and much of the pop in spot uranium last year was a result of the new Sprott Physical uranium ETF that launched in Canada. The only miner I follow at this time is Cameco (NYSE: CCJ) but I still don't see the catalyst for upside in that name right now.

Alex M.

3:46

Hi Roger. As you know, a couple of your conservative portfolio holdings have succumb to dividend reductions recently (i.e., AT&T and Dominion). With the benefit of hindsight, were there any red flags or indicators that you now recognize as potential warnings that a cut was coming? In retrospect, I see that Dominion did have an elevated payout ratio in relation to its peer group, and AT&T did have an elevated debt level. It seems that the management teams for both companies may have used the rationale of a "strategic pivot" as a justification to "right size" the dividend. As you've noted, both firms were able to afford their payouts, but they still elected to cut. Looking out across the terrain, Southern Company is a utility that comes to mind as having an elevated payout ratio coupled with operational challenges (major cost overruns). So I'm wondering what your thoughts are on these situations and what can we learn as conservative investors to avoid these types of issues going forward. Thank you.

Roger Conrad

3:46

Good question. The dividend reduction we've yet to see at AT&T and Dominion's in late 2020 were strategic in nature--that is they are/were directly related to decisions to sell/spin off assets. The difference is Dominion was up front about what it was going to do, so its share price has been relatively stable since the announcement. AT&T still hasn't told us what it's going to do and shares are trading about 25% below when it made the announcement. Even with the benefit of retrospect, I don't think numbers alone could have warned us about either move. AT&T, for example, covered its dividend with free cash flow by 1.7 times in 2021, even after spending roughly $17 bil in CAPEX--the second most in the industry after Verizon. You could maybe make the case that Dominion's payout ratio prior to selling the midstream assets was higher than management was comfortable with. But the utility routinely affirmed guidance throughout 2020 of $4.25 to $4.60, which made for a low 80s payout ratio--and given the stability

Roger Conrad

3:48

Adding to my answer to Alex' question: Given the high cash flow nature of the pipeline investments, that number is actually pretty much in line on an earnings basis for midstream companies.

3:54

I do spend a great deal of time looking at numbers to spot trouble with dividends. I believe I didn't see either of these moves in advance precisely because they reflected a management preference, rather than a vulnerability in financial or operating numbers. And unfortunately, I don't think there is any good way to predict when a company will decide to cut for strategic reasons. But historically, dividend cuts have done the most damage by far to stock prices when they are based on business weakness. And those are the situations it pays to avoid.

3:58

Finishing Alex' question, I don't think Southern Company's dividend is in any particular danger from its operating numbers or balance sheet. The company, for example, has basically been recovering its investment in building the Vogtle nuclear reactors as it's spent with regulators approval. And the remaining cost overruns don't appear large enough to really make a difference to returns, even if the state allows no recovery of them. I think the stock is high priced now above my highest recommended entry point of 65. And I will of course look over numbers and guidance carefully on Feb 17, when they're announced. But at this point, I don't see a lot of vulnerability to Southern's dividend based on its numbers.

Guest

4:09

AQN/AY vs other opportunities.
AQN 50% of my AQN holding is up 40% the other 50% is down about 13%. I would only sell the losing lots.
AY I am down about 11%.
This is a strategy question; I am not complaining. (I am up in all my other holdings where I followed your recommendations, some by considerable amounts. – thanks!)
Normally, I’d just ride it out, but it seems that now might be a good time to sell, capture the tax loss (which I can use), and change horses?
My question is whether there are some equivalent stocks that you would recommend as a stronger bet for the long term than AQN and AY?
Or how about rolling into the AQN preferred referenced earlier in the chat? And what is the ticker symbol for the 7.75% Preferred of June 15, 2024?
Thanks,
Arthur

Roger Conrad

4:09

The Algonquin 7.75% convertible preferred stock of 6/15/24 has a ticker symbol of AQNCN--though it may show up differently on different trading systems. The CUSIP number is 015857873 and the ISIN number is US0158578734. As I noted earlier, I discussed it an six other utility convertible preferred stocks in the September CUI Feature article, which you can find in the issue archives on the website.

I'm not 100% sure if swapping from AQN to the convertible will not run afoul of the wash rule--it's not the same security so it shouldn't though. As for Algonquin and its 43.92% affiliate Atlantica, both are well off their highs, as are basically all renewable power-focused companies. I see no reason not to expect a solid result in Q4 numbers and updated guidance due out in early March. And in fact, Algonquin management said as much in its mid-December Investor Day presentation. But the entire sector has come down and it's not the only high quality company selling cheaply.

richard

4:13

I saw a suggestion of Murphy oil 2027 bonds recently. They pay about 5%. I also remember dont buy the bonds unless you like the stock. I'm in my 80's a tend to be on the conservative side--what is your opinion on buying these bonds please ??

Roger Conrad

4:13

Hi Richard. We think you'll do a whole lot better with stocks of energy companies going forward than bonds. In fact, given what the Federal Reserve apparently plans to do to fight inflation, I don't think there's anything at all conservative about buying bonds now--even bonds of energy companies. Then there's the fact that yields are so much lower than they are with stocks--and as I pointed out answering a question on midstream energy companies earlier in the chat, there are midstream stocks yielding in the neighborhood of 8-9% that are increasing dividends now, and faster than the rate of inflation.

Guest

4:19

Hey Guys,Lowest earnings multiple in several years coming off it’s best Q4 ever…goes to show you how many sheep investors are out there following the herd.

Maybe now is a good time to look at the space

Roger Conrad

4:19

I think you're talking about NextEra Energy, and shares are even a few cents cheaper now than when we posted that article yesterday. This is a market where the proliferation of index-based ETFs and algorithmic trading stokes momentum. And even those of us who buy and hold long-term can take advantage by buying high quality companies when the momentum is running against them and prices are dropping, while taking a little money off the table when it pushes stocks to unsustainable valuations.

I do think investors are reacting to the retirement of Jim Robo as CEO of NextEra. But again, Q4 numbers and guidance are proof positive of the strength of the company he's leaving behind--and the stock now trades at about 25 times expected next 12 months earnings versus almost 40 not so long ago.

James

4:24

Roger, VWIUX (tax-exempt muni) a buy or sell now considering inflationary environment? Fund value has been falling since July 2021 and I am looking to add if it makes sense.

Roger Conrad

4:24

Hi James. We did greatly reduce the percentage of Vanguard Tax-Exempt Intermediate-Term bond fund in the CUI Plus/DDI Income Portfolio at the end of last year. That turned out to be timely, though the objective was to raise funds so we could add the five new stock positions.

in the portfolio commentary I wrote this week, I noted that this fund have very little realistic credit risk with extraordinary diversifications (13K plus holdings and an average credit rating over A+. It controls direct interest rate risk with very low duration. And its worst performance in the last 35 years or so is being in the red a couple percentage points. Bottom line: I haven't been bullish on bonds in general for some time. But this is a very low risk fund I'm comfortable holding even in this environment.

Guest

4:29

Hey guys,

With Nextera trading at its lowest earnings multiple in several years coming off its best Q4 ever…maybe now is a good time to consider picking up the stock that the sector is falling a bit out of favor.

What are they key things we should look for when analyzing a renewable company? Im guessing it is not that different from O&G: regulatory tailwinds/hurdles, balance sheet, cash flow, fcfy, etc…

What are some names you would recommend looking into that hold real earning currently?

Thanks

Roger Conrad

4:29

I'm guessing this is an addition to a previous question. In the NextEra piece I sent out yesterday I promised Conrad's Utility Investor members a feature article in the upcoming issue on the best renewable energy generation companies. I intend to highlight recommendations from the US as well as some non-US companies in our Utility Report Card coverage universe.

My view for a while has been that adopters of technology--companies using solar, wind, battery technology to boost earnings and productivity--are the best bets. For one thing, they have actual earnings and pay dividends. In contrast, tech developers either have no earnings or else are in a race to the bottom to produce the best solar panels etc at the lowest cost. That benefits the adopters and that's where I'm focused now.

4:36

Do you have a price at which you would start to take profits in ABBVIE?

Roger Conrad

4:36

Very good question. Abbvie has run a long way in a short time, since finally breaking out of that trading range in the $110 area. It also just hit a new all-time high today. On the other hand, this still isn't a very expensive stock at 10 times expected next 12 months earnings. And it could actually go higher to the extent revenue growth from treatments like Rinvoq exceed projections for offsetting loss of Humira sales next year, as patents end. Emerging competition for Humira has been the real issue for Abbvie stock since we added it to the CUI Plus/DDI portfolio in March 2020. Our bet that they'd beat expectations has paid off. And I expect more solid results on Feb 2 when Q4 results are released.

As for taking profits, at the end of last year, we sold 25% of our position in Abbvie. I think if we saw a rally over $145, I'd probably take another 25% off the table to lock in some more profit. But at this point, I think there's likely more upside--not enough to buy more but to hold on.

Dan

4:47

Hi Roger, thanks for the alert on HASI earlier this week and the alert on NEE. Both are now in my portfolio. I also have AES in the portfolio. Is now a good time to upgrade my portfolio with more NEE and less AES? I'm thinking they operate in the same sector space? Thanks Dan

Roger Conrad

4:47

Hi Dan. You're more than welcome. Both Hannon and NextEra are best in class in their respective energy efficiency/renewables related businesses. And I expect Hannon's results to be released on Feb 17 will be just as solid as NextEra's were earlier this week--though both stocks are still seeing some selling momentum. That's also true for AES, which announces Q4 numbers and guidance on Feb 24. It also has some major upside catalysts this year, including a boost to investment grade by Moody's. And it's not expensive either at less than 14 times expected next 12 months earnings. Again, there's still selling pressure against stocks in these green energy indexes--and AES is in 171 indexes, Hannon is in 144 and NextEra is a member of 158. So all three of these stocks are likely to move together. Underlying businesses, however, have their differences: Hannon is involved in lending and investing, NextEra is all in the US and AES has 50% of revenue from overseas, for example. I prefer holding all 3.

Fred L.

4:50

For Roger,

First of all, thank you all for a great service.

What are your thoughts on Centerspace (CSR), the former IRET? Is it a candidate for adding to the REIT Sheet?

Thanks again

Roger Conrad

4:50

Hi Fred, Centerspace is not a REIT I currently track, but it looks like an interesting choice to pick up as an "umbrella partnership" REIT with a decent track record--and recent dividend increase. Thanks for the suggestion.

Jeff

4:55

I've owned AQN and AQNU for a while. What is you opinion on AQNU. Both have not done that well since I bought.

Roger Conrad

4:55

Hi Jeff. I have addressed Algonquin and its convertible preferred shares several times during this chat. As I've said, I consider it a very high quality company that's been caught in the same downside momentum as others associated with renewable energy. But based on what we learned from Investor Day last month, the business plan is still very much on track. The big challenge this year will be closing the acquisition of Kentucky Power from American Electric Power. At this point, the transaction appears to be on track, and the company expects an immediate lift to earnings per share in addition to a long-term boost from converting that utility from higher cost coal to lower cost wind power. They've also managed to basically finance the deal in advance, a big plus with interest rates and the stock market this volatile. I think that makes this stock attractive and I intend to stick with it. The next big date is Q4 earnings and updated guidance in early March.

Eric F

4:56

I had emailed questions, but it sounds like you've been through all the emailed questions, so i'll add them here just in case.

Roger Conrad

4:56

Hi Eric. Actually, I was still working on the emailed questions but I'm happy to answer them here.

Roger Conrad

4:57

....with the exceptions for those concerning stocks from "Creating Wealth."

Hans

4:59

Elliott/Roger In your portfolios where the Rating and Price are close, do you still suggest that an investment in that stock is advisable. Thanks

Elliott Gue

4:59

Our "buy under" prices aren't target prices, rather they're intended as a guide for a good price to pay for one of our stock recommendations. We see the potential for our picks to rise well above our "buy under" prices.

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