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10/29/24 Capitalist Times Live Chat

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Gary C.

2:55

First Thank You again - being able ask occasional questions is such a great benefit in addition to the great newsletters. I have made money using your guidance.

1. I bought IRM when it was a REIT - it’s had a great run but PE is concerning - any advice.

2. DOC - I owned it, sold it for a small profit- is it worth another look?

Thank You !!

Roger Conrad

2:55

Hi Gary. it's our pleasure. Thanks for joining us today. All of the data center REITs have had a pretty good run over the past year. For a long time, Iron Mountain was the laggard and the only one I could recommend in the REIT Sheet on the basis of value. But it's up more than 90% this year, so I think long-term holders should think about taking a partial profit.

The AI boom is for real. And data centers are busy upgrading. But at the end of the day, the earnings benefit is going to be a bit trickier than current stock prices would indicate. Mainly, competition is fierce and the long term costs are still unknown, particularly for energy. That to me raises the risk of disappointment that could erase the parabolic gains we've seen recently.

As for Healthpeak, it's had a nice bounce. But the dividend remains frozen and under some pressure. I rate it a hold. Look for an update of results in the December REIT Sheet.

Jack A

3:00

Hi Elliott:

If Trump gets re-elected, I'm assuming his "drill, baby drill" policy will put downward pressure on natural gas and oil prices. He even predicts cutting energy prices in half... But I'm assuming Trump would immediately reverse Biden's ban on building new LNG export terminals... What are your favorite investments, considering this scenario?

Thanks

Elliott Gue

3:00

Thanks for the question. I don't believe a Trump administration would change the outlook for oil or natural gas prices near-term. US producers are focused on generating free cash flow (cash flow after all expenses and CAPEX). Producers can't control the price of oil or gas, they can only control CAPEX. Their production levels -- and by extension overall US production of oil and gas -- is a function of the producers' drilling activity which is, in turn, a function of the amount of capital they spend. AT current oil prices below $70's, I'd expect US producers to cut CAPEX and allow production to fall or flatline in an effort to maintain free cash flow. The longer oil prices remain low, the more, and faster, US production is likely to fall. Same is true of gas sub-$3 (names like Expand/EQT cutting CAPEX and deferring wells). Of course, falling US oil and gas supply would tend to put a floor under prices over time. Without higher commodity prices, you don't get more supply regardless of which political party

Elliott Gue

3:00

controls Congress and the White House. I do think it's fair to say that a 2nd Trump Administration would adopt policies friendlier to the oil and gas industries. I'd see three implications. 1. A reduction in tail risks for the industry -- a Trump administration would likely end the LNG pause and there's lower risk of a "windfall" tax on oil & gas as the UK has imposed, some sort of a "carbon tax," renewables mandate or similar policies. This, on balance, encourages more supply and lowers prices over the intermediate to long-term 2. Longer term, US production levels are a function of CAPEX and I suspect oil and gas producers are going to feel more comfortable making long-term investments with the threat of regulation/anti-fossil fuel policies from Washington removed. 3. I can see more M&A under a Trump Administration -- the FTC has delayed a few industry deals over the past year and I suspect a Trump FTC would be friendlier towards (in my opinion) much-needed consolidation.

Don L.

3:05

Roger

It does appear that the Dow Jones Utility Index is topping. Do you foresee this as a short- or long-term top.

Regards

Roger Conrad

3:05

Hi Don. I think some of the components of the DJUA have gotten ahead of themselves for the moment--Southern Company (NYSE: SO) in the 90s is a good example. But other index stocks like AES Corp (NYSE: AES) are historically cheap. And the largest by capitalization--NextEra Energy (NYSE: NEE)--still hasn't made a new high this cycle so far.

I do think we've seen capital slosh back to the former leaders--big technology mainly--since the Fed cut rates on September 18. I've called that buy on rumor sell on news behavior from investors. And the slump in the DJUA, DVY, REITs and other income stocks since mirrors the back up in interest rates.

I expect to see income stocks switch places with Big Tech again and outperform over the next 2-3 years--with new highs on the DJUA. The big question is if this run in the extremely expensive, historically overweighted Big 6 tech stocks will end quietly or with a crash in the overall market. And the risk of the latter is why we're holding cash now rather than going all in.

Robert B

3:13

Since there was the mention of SMART BONDS, would you please give an insight as to why TLTW is currently being affected with some headwinds.

Elliott Gue

3:13

Ultimately, the core asset of the TLTW ETf is the iShares 20+ Year Treasury ETF (NYSE: TLT). TLTW owns units of TLT and sells call options on those TLT units each month to generate additional income. Since TLT owns US government binds (Treasuries) with 20 or more years until maturity it will tend to fall in value when yields rise -- the 30-year yield is around 4.5% today, which is up from 3.93% at the lows in mid-September though it's still well below the 5%+ level we saw in 2023 and the 2024 peak in late April around 4.8%.

Elliott Gue

3:13

However, because TLTW sells covered calls to generate premium income, it will tend to outperform TLT in a rising rate environment. For example, since mid-September , TLT is down 8%+ and TLTW is down around 6%. In Smart Bonds, I do NOT recommend TLT. While I think rates have likely peaked this cycle, I think long-term Treasury yields are likely to slowly drift lower over time, not see a major, sustained rally. (A big rally is only likely when recession is imminent). I do recommend a small position in TLTW because this ETF benefits from the volatility in LT bond yields. Since recommendation at the end of May, TLT is up 4% (about 9.9% annualized) and TLTW is up 5.5% (13.6% ann.). Also note that I recommend TLTW in SB only as part of a diversified portfolio of Bond ETFs, many of which can perform well in an environment of flat-to-rising Treasury yields.

Ed

3:15

Should some catalyst cause the oil price to spike or go up from the floor it sounds like we might be on, which companies would stand to grow the most in terms of value?

Elliott Gue

3:15

Typically, in such a scenario, you'd see the producers benefit first as they see the most immediate impact on their cash flows from higher commodity prices. So, names we recommend like EOG, OVV would likely rise first and fastest.

Mike C.

3:21

Good afternoon gentlemen and Sherry –
Several questions…
   I’m sure you’re going to get this one a lot…your thoughts on NEM?
   Do you have a current cycle price target for gold?
   Yesterday’s EIA suggests you see great things ahead for KMI. Thanks to your strong endorsement, I’ve accumulated KMI at distressed prices for years, and am now looking at a position that’s nearly doubled. So, I’m curious: do you have a price target?
Thanks for holding these, and all the focused, excellent guidance over the years –

Best

Roger Conrad

3:21

Thanks for joining us today Mike. Adding to my answer on Newmont earlier in the chat, I think the Q3 results were solid and the guidance in line with previous statements by management. I also think all of that good news was priced in before the announcement, and that analyst expectations were too high. That was my suspicion before and why I did not previously raise the highest recommended entry point above the current 50. I think the selloff is a great buying opportunity for anyone light on the stock. And I think we'll eventually see a $100 price for NEM, as well as a new inflation-adjusted high for gold (now about $3,500).

I raised the highest recommended entry point for Kinder to 24 from the long standing 22 and would not buy above that. I do think we'll see a price in the mid to upper 30s this cycle. But I think it will take some patience to ride it there.

Susan

3:27

Dear Roger & Elliott,

Thank you for sharing your wisdom gained through many market cycles. You are truly a dynamic duo.

With recent bipartisan calls to end the LNG export "pause", which companies are most likely to benefit? Pipelines, LNG producers, shipping companies, etc. seemingly would benefit?? Your thoughts are appreciated along with any specific suggestions if you think investing with LNG exports in mind is wise.

Thanks again for your hard work

Elliott Gue

3:27

Thank you for the kind comments about or work, it's much appreciated. I do think the LNG export permit pause will ultimately be rescinded. In the near-term, I don't see that having a huge impact as most of the impacted terminals weren't slated to go in-service until 2029 or so; terminals already under construction or with existing permits were unaffected by the pause. On the margin, however, I think you'd see many companies at all levels of the supply chain benefit. One area that I believe could see some sizable upside are producers like Expand Energy (EXE, the company formerly known as Chesapeake) and EQT (EQT). Right now, US gas prices are depressed due, in large part, to the warm winter of 2023-24 and associated elevated storage. However, the gas futures curve does suggest higher prices into the second half of 2025 due, in part, to the start up of several new LNG export terminals in 2025-26. At current gas prices, EXE and EQT are generating minimal free cash flow, but at prices in the $3.50 to $4/MMBTU

Elliott Gue

3:27

range longer term, that free cash outlook changes dramatically for the better. The stocks are not getting "credit" for the potential free cash flow uplift from higher long-term gas prices. That's despite the fact companies like EXE are already signing contracts to supply LNG export terminals with volumes of gas. My view is that as the pipeline of US LNG export terminals continues to fill out -- especially beyond 2029 -- that could be a catalyst for repricing in these stocks. By my calculation, EXE is worth $130 to $140 on a discounted cash flow basis if I use a long-term natural gas assumption of $4/MMBtu. Of course, greater visibility on US LNG exports would also support the pipeline and gas midstream names which would benefit from rising volumes moving through their systems.

Don

3:28

Looking to add some new positions. What do you think of UGI, CVX and SHEL.

How about AQN, AVA and CWEN.

Do you still cover SOHO on the REIT sheet.

Thank you.

Roger Conrad

3:28

I've personally owned Chevron since prior to the Texaco merger through its DRIP. It's been a huge winner and I think there's a lot more in the tank--definitely prefer it to Shell, which in recent years has been held back by erratic strategy decisions and heavy leverage. UGI is a comeback utility but faces a difficult road turning around Amerigas Propane and is likely to freeze its dividend the next few years. Algonquin also has a ways to go on its recovery track, though I think the worst is behind it. Avista is a conservative income stock. And Clearway Energy is a bit more aggressive but combines a 6% plus yield wtih 5-8% yearly growth. I do still cover Sotherly Hotels in REIT Sheet. It's in a battle for survival and I've been advising readers to steer clear.

All of these companies are tracked regularly in our advisories.

Elliott Gue

3:30

Here's one from my e-mail queue Question: CT & CUI seem to place little emPHAsis on charts & financial ratios. Additional to things I saw and separately commented on re AQN & NFE, I observed this in what Elliott said in recent interview with Steve Barton … re CNQ & PEYUF, also ARLP.
CNQ has broadening megaphone pattern since May 2024, generally bearish. Elliott prefers larger companies (PEYUF is 2x BIREF) and lower debt. Yet, PEYUF increased debt:capitalization to 35% while BIREF decreased debt:capitalization to just 15%. And while PEYUF cash flow (CF) indeed held up better over last 2-3 years, its absolute CF now is just same as BIREF despite being 2x the capitalization. So, stated preference for PEYUF does not compute.
ARLP has massive inverse H&S pattern back to 2016. Alternatively, cup & handle formation since 2018. Both unmentioned. Solid financials, strong dividend & yield since 2021, even if possible cut. Price potential to go from $25 now to $40-50.

Answer:
Thanks for the questions.
I use charts all the time. In fact, every weekend I do multiple technical market screens, look at charts for the 10 largest stocks in each of the 11 S&P economic sector indices. Of course I also follow charts for the major commodities including oil, natural gas and gold/silver. I probably look at 200+ charts every week because I believe it helps me spot areas of interest.
I’d say technicals are a large part of my work on trading services we publish. On longer term services like Energy & Income advisor I use the charts mainly for helping set buy and profit targets. While my focus on longer-term services tends to be more skewed to fundamentals and related factors, I still always examine and monitor the charts of any stock I consider recommending.

3:31

CNQ is not a recommendation in any newsletter I write for though I have followed the stock to some extent for years. Part of the Steve Barton podcast I did was a Q&A segment and a listener e-mailed in a question regarding CNQ, including my thoughts on their strategy. Generally I like CNQ from a fundamental perspective, particularly their pivot in favor of liquids and exposure to unhedged oil volumes. Also like their acquisition of assets from CVX. In short, I answered the question I was posed on the show re: CNQ fundamentals, and the fact that I didn’t discuss the charts doesn’t mean I don’t use charts.
We do recommend ARLP in EIA. I was asked about it on the podcast as well and indicated that we’re bullish on the stock. SO, I don’t see how my comments on the show are inconsistent in any way with what we’ve written about re: ARLP in EIA.

I am not sure what you mean by financial ratios. I don’t place much emphasis on the price-to-earnings ratio in Energy and Income Advisor because I don’t believe earnings are a particularly useful metric for many energy firms as they’re distorted by non-cash accounting charges. I tend to prefer Enterprise Value to Free Cash Flow (FCF). Indeed, I put a lot of emphasis on FCF, particularly for producers (E&Ps). I frequently use either a discounted cash flow model or EV/FCF valuation techniques for determining my profit and buy targets for E&Ps – I’ve included several of these models in the service over the years.

As for PEYUF and BIREF, again these are both stocks I was asked about on the podcast. I recommend neither, however I am familiar with both to some extent. Birchcliff has an enterprise value of $1.92 billion C$ and the median consensus of analysts is that their FCF will be negative this year and in the $28 million range in 2025. PEYUF has an enterprise value of C$4.33 billion and is expected to generate positive free cash flow in 2024 and around $350 million in 2025. In my view Peyto is clearly the higher quality company.

Susan

3:35

It has been helpful to read your explanations about the patience that will be needed to get the most benefit of lower rates. Do utilities and reits have similar potential or does one sector versus the other make more investment sense at this juncture? Thank very much.

Roger Conrad

3:35

Hi Susan. I think the best of both sectors should see strong upside the next 2-3 years, though for somewhat different reasons. The case for electric utilities is their long-term investment-led growth plans--which companies were able to stick to despite higher for longer interest rates and now have powerful tailwinds from AI demand and the Fed's pivot to lower rates. I expect Q3 earnings and guidance updates to generally confirm this thesis is on track the next few weeks.

REITs are quite a diverse asset class as I've commented in this chat. But in contrast to utilities, their investment plans have been curtailed as the result of higher for longer interest rates. The best in class have maintained payouts and balance sheet strength. Now lack of investment in multiple types of property the past 2-3 years is tightening supply again at the same time lower interest rates start to bring down costs. Sector risk is higher than with utilities overall but there is upside for companies that can stay the course.

Roger Conrad

3:35

I'm bullish on the best of both sectors.

BKNC

3:41

I would appreciate your thoughts on NEP and CVS. I know we were waiting for Nov 6 for NEP but I now wonder if they will break the company up. The one stop shop strategy seems to have failed. I am not sure if there is any point holding on to dead money now. NEP is off to new lows.

Roger Conrad

3:41

I think if you've been holding NEP this long, you might as well hang on until parent NextEra Energy tells us what it's going to do with it. Management says that will be in January and I see no reason to doubt it. And in any case, it's hard to see a lot of downside with the stock priced to yield nearly 19%--or for a two-thirds dividend cut. They may decide to buy it out. But they could do so at a much higher price and still boost earnings.

CVS is going to hold its Q3 earnings call on November 6. And as I've said, I want to see more signs of business stabilization. But here too, the mood of investors is pretty bleak and the bar of expectations is very low at 8.5X forward earnings. So I don't see a lot of risk to holding on and seeing what's reported out.

Dudley

3:42

Hi guys .

Roger Conrad

3:42

Hi. Thanks for joining us today.

Herm

3:42

I own shares of OVV which have continued to fall over the last several months. Would this be a good time to add to this position?

Elliott Gue

3:42

Like so many energy stocks I follow -- particularly producers like OVV -- the performance of the stock is correlated to the macro outlook for commodity prices. There are idiosyncratic markets for energy at times -- when stocks move mainly on company-specific fundamentals -- but right now it's all about macro drivers, oil and gas prices. OVV still looks cheap in terms of the free cash flow it can produce in a moderate commodity price environment ($80/oil, gas in the $3.50 to $4/MMBtu range), also the stock is sitting on a key technical support level in the high $30s. We do believe its a great value at the current price. The key catalyst to drive upside in the stock would be improvement in oil and gas prices into 2025.

Dudley

3:51

Hi guys. Thanks again for these sessions. My question is KYN has gone to monthly dividends. As an investor I like it obviously. Do you see others (WMB,KMI, AMLP etc….) going this route? Thanks

Roger Conrad

3:51

Yes, Kayne Anderson Energy Infrastructure Fund (NYSE: KYN) now pays a monthly dividend. The most recent declaration covered payments for November, December and January at a rate of 8 cents per unit. That's equivalent to the quarterly rate of 24 cents per share declared for payment earlier this month, which was a boost from the prior rate of 22 cents.

KYN is a closed end fund. AMLP is the Alerian MLP ETF and pays a quarterly dividend. Going monthly would be up to the sponsors, always possible but nothing appears in the works now.

As for Kinder Morgan and Williams Companies, they're individual stocks with long histories of paying quarterly. It seems unlikely they'd switch to monthly but we'll let you know if they do. In the REIT Sheet coverage universe, there are a few monthly payers--one being Realty Income Corp (NYSE: O), which is a buy though it's not on my recommended list at this time.

Looks like a good topic for a future article. Thanks.

Arthur

4:00

Thoughts on SLB? Thank you, Gentlemen.

Roger Conrad

4:00

Hi Arthur. We still like SLB as a long-term holding and view the current price as a great entry point for anyone without positions. As we noted in the Energy and Income Advisor posted this week, Q3 results were solid and guidance firm. Investors appear to be pricing the stock for what's likely to be a soft environment into 2025. And energy services stocks tend to be among the last to benefit from energy upcycles. But SLB despite losing ground this year is the best in class of a vital sector and we remain bullish long-term.

Jim

4:05

Hi Elliott, not sure if this was asked already but could you give some insight into SLB's earnings and the stock action. Stock has been in a year's long bear market and wonder if the worst is yet to come.

Elliott Gue

4:05

SLB's Q3 numbers were solid, expanding profit margins and free cash flow above expectations. I think the problem is their guidance -- it appears management sees another year of modest growth in 2025. CAPEX from oil and gas producers -- particularly national oil companies like Saudi Aramco and supermajors like XOM -- represents revenue for SLB, because the producers pay SLB to help them drill and complete wells and put new projects into production. So, with oil and, to a lesser extent, gas prices stalled, the producer spending cycle has "paused" in 2024-25. Ultimately, I suspect the cycle is not over (not even close) and that we'll see a new wave of spending into 2026-27 amid higher commodity prices and a need to bring new supplies online outside North America. SLB will benefit from that, particularly in markets like deepwater where they excel. However, near-term investors are focused on the stalled growth outlook, not the potential for a "second wind" for the cycle in late 2025/early 2026.

Elliott Gue

4:05

While SLB is still up by 100% including dividends since the end of 2020, it's down about 22% since the end of 2022 (roughly the past 2 years). I continue to prefer SLB to HAL thanks to its greater leverage to deepwater and non-US/Canada markets (SLB has outperformed HAL by about 5% since the end of 2022). I also think SLB is a good long-term buy into technical support in the high $30s/low-$40s as I believe we'll ultimately see the stock retest the early 2018 highs around $80. Near-term, however, there's greater momentum behind our other services pick in the portfolio, BKR which is benefiting from leverage to LNG build-outs.

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