JotCast | 10/27/22 Capitalist Times Live Chat

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10/27/22 Capitalist Times Live Chat

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Buddy

3:48

Elliott, At the start of the covid pandemic, I listened to one of your presentations on the market's outlook as you were sitting on a park bench in Miami Beach. You were so bearish I was ready to put a gun to my head. You preached severe gloom and doom yet the market bounced back quickly and went to new highs. Now, you seem to have the same mindset and while I am also bearish I am wondering if your extreme bearishness is a bit overboard. What say you?

Elliott Gue

3:48

I was bearish in the spring of 2020; I didn't turn bullish on the S&P 500 again until late-summer/early autumn. I must confess I did not expect the government and Federal Reserve to go quite as far down the stimulus route as they did -- US government spending as a percent of GDP soared to levels we haven't seen since World War II and the Fed slashed rates to 0 then did more QE in a few months than it did in the entire period since the financial crisis of 2007-09. We've never seen a coordinated monetary and fiscal expansion of that magnitude in history. I didn't expect that partly because I thought some of the "powers that be" would remember the lessons of the late 1960's when coordinated fiscal and monetary expansion ended in the Great Inflation period of the 70s. While the COVID stimulus response did prompt a market recovery (led by growth and earnings-less growth) it didn't really end the economic problems we faced in early 2020, merely delayed them. So, today, we're actually facing the hangover --

Elliott Gue

3:48

sky-high inflation, still-inflated market valuations, the need to raise interest rates at the fastest pace in decades and growing odds of a severe economic downturn. I've become increasingly bearish since early December of 2021 and, if anything, I've been a little too conservative with my downside targets for the S&P 500 and Nasdaq. I don't actually think my bearishness is extreme at this time -- I'm looking for an average-sized bear market taking the S&P 500 back to late 2019 levels and, right now, I actually see scope for a significant bear market rally. As always, if the facts change, the fundamentals improve or the technicals support a different view, I'll revise my outlook. But for now, I think my outlook has been pretty much spot on, if not a bit too optimistic.

Roger Conrad

3:50

Continuing on Avangrid, if the offshore wind economics have changed enough for it to stall development, there are plenty of place to divert the CAPEX to the regulated utility grid, including the Canada/New England power line that appears to be getting a new breath of life. That's why there's been no change in management guidance to date. I guess the real question for offshore wind is how much regulators in New York/New England especially are willing to pay for big baseload power that is zero CO2. And that may be tested. But at this point, I think a lot has to go wrong for Avangrid to miss its mid-single digit annual percentage earnings growth targets.

Sandy W.

4:01

Hi Roger,

Re: I am a recent investor in CUI+. I appreciate the lesson in each asset's 'weight'. I have three accounts and am purchasing double the basic plan for each of the 3. They all have some different holdings. I have done quite a bit of selling to buy your recommendations. I have ABBV in one that I bought at $50, sold some and bought more at $80 way back when. ABBV's share price has been above your recommended entry point for the other 2. In one account that had cash on hand I bought the full recommended number of shares at $154. I'm waiting for the market to rebound so I can get a better price for long holdings. You were expecting ABBV's price to drop later this year and maybe raise the recommended buy limit. I'm waiting with bated breath for the new entry point. Thanks for the gift of these chats.

Roger Conrad

4:01

Hi Sandy. I'm very happy CUI Plus has been so useful for you. My preferred strategy is building positions over time in best in class companies like Abbvie--which continues to be a big winner. At this point, however, I'm more of the mindset that we might take a little money off the table at this point in ABBV. My view is the company is succeeding in finding replacement revenues for Humira when the US patent expires next year. And I expect that to be a great catalyst for future earnings and dividend growth. But this latest push past $150 appears to be fueled more by investors afraid to miss out on a rally. Again, I like this company as a long-term holding and I will raise the highest recommended entry point as it proves its case replacing Humira revenue. But my overall thought on this rally is it's likely to fizzle with recession risk rising--so I will likely raise cash from ABBV and/or other holdings in the near future.

John C.

4:04

i may not be able to attend. would like to see these question addressed:

Thoughts on impact of Feds proposal to buy oil to replenish the strategic reserve at a price around $70. Effect on oil production in U.S.? timeframe? who will benefit from this?

Outlook for super majors and recommendations?
particularly interested in XOM and TTE.

Comment on HASI and outlook.

Elliott Gue

4:04

Thanks for the questions. The government's plans to replenish the Strategic Petroleum Reserve remain a bit vague -- the basic idea is that they want to buy oil for delivery further in the future and at prices "at or below $67 to
$72 per barrel." I don't expect any action on this plan until late next year at the earliest. Basically, I see the prospect of SPR-related oil demand in this range to offer a further support for oil prices at the low end of our projected range of $70 to $80/bbl. In my view the much bigger impact on oil prices comes not from the Fed's plans to replenish SPR but from their plans to stop releasing oil from SPR in December. I wrote a piece about this over on Substack the other day and I've also written about it a few times in EIA. The gist is that SPR is now depleted to early 1980s levels and the government has been releasing 1 to 1.5 million barrels every day since last spring. These releases have showed up in commercial oil inventories -- basically commercial inventories have

Elliott Gue

4:04

remained flat for months only because of oil coming out of SPR. Now, SPR releases are set to slow to around 500,000 bbl/day in December and then (likely) cease altogether after that. Once that source of supply fades, there will be downward pressure on oil supply and upward pressure on price. Basically, SPR releases, on a scale never before seen in history, have artificially increased US supply. We still like the supermajors, including XOM and TTE. XOM has probably the best growth profile of any of the supermajors because they invested in new projects straight through the 2014 to 2020 bear market in oil prices. This puts them in a position to boost oil output just as prices rise and remain high (based on our forecasts) for the next few years.

Larry W.

4:06

What is the outlook for Southwest Gas (SWX)? Hold? Sell? Buy?

Roger Conrad

4:06

Hi Larry. It looks like we won't have that opportunity to take partial profits for a while, as we did earlier this year with the price over $90. But that's basically because the stock market slump and rising cost of debt capital has likely delayed any major M&A--such as a potential takeover. On the plus side, the company appears to be profitably integrating its three parts--regulated gas utility, natural gas pipeline, utility construction. And we should see that reflected in earnings due out mid-November. Also, Carl Icahn is still stirring the pot, now with nearly 10% ownership--which ensures it won't be business as usual and we will eventually get that boost from M&A. Those who own SWX should hold and it's good for fresh money under 80.

AlEck

4:09

Good aftenoon, Roger. I appreciate your good advice for selecting stocks but do you have a recommendation for where to hold cash while waiting to purchase them?

Roger Conrad

4:09

We use Vanguard Federal Money Market (VMFXX) in the CUI Plus Model Portfolio. It yields 2.3% currently. But really, any money market fund should provide roughly the same convenience and return at this time.

H.P. Nathe

4:14

Hello Roger,

Thank you for hosting these chats. I find them very valuable.

Can you tell me though, why Exxon Mobil is on such a tear recently? Is there something going on that I am missing? Any insight that you might have would be appreciated.

Thanks

Roger Conrad

4:14

ExxonMobil is a great company that we've been recommending from a much lower level this cycle. And we expect they'll have some very strong operating numbers for us tomorrow--as well as a dividend increase. If you look at the share price, you'll see a dip in late September when the stock market started to decline sharply, followed by a solid rally. I would say part of that boost was because oil found a bottom and moved higher. But one thing that was different this time is ExxonMobil and other energy stocks actually outperformed the price of the commodity. I think what we're seeing at this stage of what we've called an energy super cycle is investors starting to appreciate that supply is constrained relative to underlying demand--and that lagging investment is tightening it further. If the Fed pushes the economy into recession, demand will drop and prices fall temporarily. But powerful companies like XOM will keep buying back stock and raising dividends--and when demand returns, prices will rise higher still.

Roger Conrad

4:16

Bottom line: XOM and other major energy companies are now getting their due as big, safe and powerful companies to weather tough times short-term but prepared to ride the energy super cycle that's still in all likelihood in its early stages.

Robert W.

4:21

Hi: I'm a very long subscriber & think you give great advise. My question is about USAC on the Endangered Dividend list. My theory is the Fed. Gov't. can't be at war at fossil fuels forever simply because renewables can't provide enough stable energy to run the economy. Wouldn't a company that provides values/ compression equipment be in a sweet spot when drilling comes back? Thank you.

Roger Conrad

4:21

Hi Robert. I think they're a solid company with a major presence in a vital area of energy. But USA Compression Partners also has very tight dividend coverage, which we should see again with Q3 numbers on November 1. There's substantial debt leverage, which could be reduced with a dividend cut. And it's 47% owned by its general partner Energy Transfer LP (NYSE: ET)--which clearly has an interest in issuing the needed $1 bil or so in common stock to take it private, as it has other affiliates. That's enough risk to the dividend to keep USAC on the EDL in my view, though the business should benefit later in the super cycle.

das555

4:24

Any thoughts on EGY (Vaalco Energy), recently declared a "best idea" by a Seeking Alpha author?

Roger Conrad

4:24

This isn't one we've followed in Energy and Income Advisor. I would, however, caution on three things. First, the stock is already up close to 60% this year. Second, the market capitalization is less than $550 mil, so it's quite a small company. And third, it hasn't paid a dividend for very long. Things might work out and earnings in early November will give us a chance to see the health of operations. But we think there are much better ideas in energy--starting with the stock in the EIA Model Portfolio.

John

4:27

Please provide your opinion on CNQ going into earnings on 11/3.

Roger Conrad

4:27

Hi John. We track it in the Canada and Australia coverage universe, which you can access by clicking on the Portfolios tab on the Energy and Income Advisor homepage. We rate it a buy at USD60 or lower--it's a solid integrated energy company with more dividend growth on the way. I also think the fact it's priced in and pays dividends in Canadian dollars will ultimately be a plus for US investors as the energy cycle continues.

Willy

4:34

Roger, are you still looking for a major price slide in the energy patch? I’d like to add to my exposure, but most don’t look cheap anymore, except for some of the pipelines.

Roger Conrad

4:34

Hi Willy. What we believe is recession risk is rising and that the stock market has therefore not seen its bottom for the year yet. Energy stocks has shown they're not immune when stocks sell off. But we believe damage on the downside will be considerably less and the recovery faster and more vibrant than the rest of the market. Building positions in this environment effectively means watching prices and buying opportunistically, preferably at Dream Buy prices but in any case below the highest recommended entry points we set in our "Ratings" column in the Model Portfolio. And it can mean taking money off the table temporarily, as we've done as well.

Guest

4:38

Retired investor looking for income thinking of selling some lower yielding energy names to buy pipelines like KMI ... is that a good swap at this time or best to sell and wait for the likely recession and associated market drop to buy?

Roger Conrad

4:38

That's a good question. The best answer to it is to buy incrementally, rather than making all of an investment at once. An example would be to decide how much KMI you want to own, then invest a third of that in the next week or so. Buy the next third six weeks after that, and the remaining third around the first of the year. In any case, Kinder showed us in Q3 results that it's on very solid ground with a safe and growing dividend, strengthening balance sheet and conservative CAPEX plan. It's a stock we can own with confidence in a potential recession and can expect big returns from as this energy cycle continues.

Guest

4:42

Strong U. S. dollar making CDPYF low? Thanks.

Roger Conrad

4:42

That's certainly one reason for the slide in the US dollar price of Canadian Apartment REIT this year. Another is the performance of North American REITs in general, with the S&P Real Estate Sector sub-index lower by more than -30% year to date. But the important thing is the underlying business is still healthy, which we should see confirmed November 8 with Q3 earnings. This is still a well managed company with a strong balance sheet in a low risk sector of high end apartments. Insiders have recently bought and Bloomberg's analyst count is 12 buys, 1 hold, 1 sell--so pretty solidly bullish. By the way, the US dollar price is up about 16% from the low point as of today.

Guest

4:47

Do you still like AQN's prospects? Thoughts on using AQNU as a way to get into AQN at the current prices or better to buy AQN directly?

Roger Conrad

4:47

I answered this question pretty extensively at the beginning of the chat, so I won't repeat everything. Short answer is I expect the company to report solid Q3 numbers and guidance on November 11. I think investors are pricing in too much regulatory and funding risk for the CAPEX program, including the approaching acquisition of Kentucky Power and regulated wind power buildout in that state. There's been some downside this year from the Canadian dollar on the price--but the dividend is paid in US dollar, insulating US investors. Bottom line: The stock is cheap, the convertible preferred will pay a higher dividend near-term but should not be confused with conventional fixed income. It mandatorily converts to stock and its value at that point will depend on where AQN trades.

Dan

4:51

Hi Roger, thanks again for hosting the chat. It looks to me that almost every utility got slamed in the last month except CEG, it held right in there at $85 range. How did it escape the algorithem induced sell off? Is CEG not in the the Dow Jones Utility index, or does it just have really super outstanding future prospects? Thanks for your thoughts

Roger Conrad

4:51

Constellation Energy is actually a contract power producer and has no regulated utility operations. The reason the stock has escaped the downturn is it's also the leading producer of nuclear energy in the US by far--and that source of energy has become increasingly valuable the past few years from surging natural gas prices as well as decarbonization efforts. My view is there's a little too much enthusiasm in the stock right now--promised earnings and dividend growth for example are mainly based on cost cutting--and it wouldn't be a bad idea for those who picked up shares in the Exelon spinoff to take a little money off the table. But it's certainly been a huge winner for us this year and I intend to hang onto at least a piece of it.

Buddy

5:02

Roger, Will the likely election of Kari Lake as governor of AZ improve the regulatory environment for Pinnacle West? The stock is off its low but still looks cheap considering the population growth in AZ as residents continue to escape California.

Roger Conrad

5:02

Arizona regulators are directly elected by the public rather than appointed by the governor. Also, Arizona already had a Republican governor, so I would not expect keeping the state red to have much real impact on what's been a highly contentious environment. The good news for utilities like Pinnacle West is they appear to have avoided becoming a campaign issue. And with interest rates rising, the ACC may allow a higher ROE than the current well below average 8.7%. The company announces earnings on November 3, so before the outcome of the election will be known--though I would still expect questions on that issue during the conference call. All in all, though, I would advise caution on PNW despite its tremendous customer growth and solar buildout potential--until we see what the new government in Arizona actually does on energy and how regulators decide the ongoing ROE case.

JT

5:09

What is your current advise on Store Capitol & the Algonquin Convertible Preferred shares? Also, do you have a price at which you would take some profit in Exxon?

Roger Conrad

5:09

I don't think we're there yet with ExxonMobil, but we will have an alert in Energy and Income Advisor should that become the case. I had comments on the Algonquin preferred answering an earlier question--basically a good alternative to the common for those who would sacrifice a little potential upside for a higher yield, though not conventional fixed income. Store Capital we cover in The REIT Sheet--it's in the process of being acquired for $32.25 per share in cash by a private capital consortium. The deal is expected to close in Q1 2023 and no further dividends are expected. Since upside to the takeout price is limited and downside from unexpected deal failure would be mid-20s, those with positions are best off selling ahead of the close in my view.

Guest

5:13

The results of Exelon's spinoff of Constellation has been nothing but breathtaking. Most spinoffs as I recall provide far less gains. What was so special about this transaction and does it suggest DUK and SO should consider the same action?

Roger Conrad

5:13

Constellation was a unique situation as it was a separate unregulated unit of Exelon Corp prior to the spinoff. And since the deal was announced, nuclear energy has become extremely popular with investors--for decarbonization as well as because fossil fuels have become far more expensive. In contrast, nuclear power plants owned by Duke Energy and Southern Company are held within regulated utilities--it's extremely unlikely they could be spun off even if the companies wanted to.

John

5:19

Hi Elliot & Roger: PXD just released Q3 results. The stock is currently up from the close roughly at $270. They reported avg oil price realized of $93/bbl & a total div of $5.71/sh. Would you expect the Q4 div to be up or down from the current level? Thanks.

Elliott Gue

5:19

PXD pays a variable dividend based on their cash flow. For Q3 there was a $1.10 base dividend plus $4.61 variable and PXD also bought back $500 million worth of stock. Their production guidance was right on target and costs/CAPEX plans for Q4. Right now, oil and gas prices are both a bit below the Q3 average so, if that continues, I'd expect the variable portion of the div to be slightly lower in Q4 than Q3. Longer term, we remain constructive on oil and gas prices so, while dividends will vary around quarter-to-quarter commodity pricing, overall we'd expect them to average out over time to be in-line with what we've seen in recent quarters. At the closing price today, that's likely to equate to a high single digits level of yield, maybe low double digits with buybacks.

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