JotCast | 11/17/20 Conrad's Utility Investor Live Chat

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11/17/20 Conrad's Utility Investor Live Chat

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Roger Conrad

2:43

When I calculate portfolio performance, I always assume equal weights at the beginning of the year for the holdings. So it's fair to say that's the basic premise--equal weightings and broadly diversified holdings with the objective of a multi year holding period--unless companies collapse on the inside or stocks reach such high levels as to merit taking some money off the table. The objective of the Conservative Holdings is to harvest a rising stream of dividends over time that will lift share prices with it. I consider them best in class of their respective utility sectors--i.e. Dominion for electric utilities, Verizon for communications etc.

Roger Conrad

2:44

The objective of the Aggressive Holdings is to generate bigger gains as whatever challenges holding them back are surmounted. And I have moved several former Aggressive Holdings over to the Conservative list as they've achieved that.

2:46

Where you would not consider this as a portfolio is that I don't recommend how many shares to own--other than the broad advice to hold what we have in a rough balance with everything else. I realize it's basically impossible to rebalance on a continuing basis, at least not economically. But if you do maintain a balance I think you'll hold down your risk--which is the best way to ensure solid results in a long-term strategy such as I recommend--where we're trying to ride a rising income stream to capital gains as well.

John G

2:54

Hey Roger, What is your favorite value situation from say your "conservative" basket of utes? Utes overall have seen a pretty remarkable run up the last 2 months.

Roger Conrad

2:54

If you look at the Conservative Holdings, you'll see a number of them trade above the "Rating" price--which is basically the highest recommended entry point. But there are also a number selling below those prices. Those would be my favorite value situations now, with the caveat that I never really ever recommend anyone load up on one particular stock no matter how attractive it looks. Right now, T, AGR, BCE, CMS, DUK, EIX, EXC, PBA, SRE, SJI and TRP are all below the max recommended entry point. T and SJI are actually below Dream Buy prices. The idea behind buying stocks lagging behind the leaders in a hot industry--utilities are though with a heavy accent on renewable energy as the top performers--is they will overcome current challenges to close the valuation gap with stocks like for example NextEra Energy. We have to pay attention to business health to make sure they do. But this in my view is clearly where the value lies now in the utility universe.

Howard F

2:59

What is your take on cxo concerning the take over

Roger Conrad

2:59

We don't track ConocoPhillips or Concho in CUI. We do in Energy and Income Advisor and we will have a live webchat on November 30 with our EIA subscribers.

Our view on CXO/COP is the combined company will be a lot stronger coming into what we believe will be an energy sector rebound, than either would be on their own. I realize a lot of people are disappointed Concho didn't fetch at better price--or even a cash price--since it traded over $90 a share earlier this year. But accepting this deal, shareholders will preserve their ability to recoup those losses. And the fact we're seeing deals like this one--and Chevron's now closed buyout of Noble Energy--in the past has been a pretty reliable sign that the energy sector has bottomed and is heading higher. That's our view here as well.

Ben from New Mexico

3:07

Good morning Roger:

CHL is inexpensive at 9 times earnings and pays a 6%+ dividend. It is 25% below your dream price. Anything changed with the stock?

Cheers,

Roger Conrad

3:07

I'll go one further on China Mobile--it's the first telecom company in the world to prove there's demand for 5G networks. And because sanctions in many countries have forced Chinese equipment maker Huawei to focus on its home market, it's been able to deploy that network far faster and more cheaply than almost anyone anticipated they would a year ago.

If you're watching the action today, the stock as well as those of other Chinese companies is selling off because President Trump has signed an order banning US investments in Chinese firms he's determined to be owned or controlled by the country's military. It's a situation that I had anticipated for a while as a possibility. It potentially affects 4.5% of the total shares in circulation of China Mobile--what's owned by US investors--and we're seeing the selling now.

It's an aggressive move that will hurt US investors. And it will have absolutely no impact on China Mobile's ability to grow its business. In fact, it could well increase government support

Roger Conrad

3:12

which in turn will increase the underlying profitability of the company. I have little doubt so long as this company is growing and rewarding investors with a rising stream of dividends that it will find plenty of investors elsewhere to pick up the slack from US investors' exit. It's unclear right now what will happen to the company's NYSE listing or ADRs. I will be updating CUI readers as these details become more clear. But at this point, we have perhaps the world's leading telecom trading at just 7.6 times expected next 12 months earnings and a yield of nearly 7%. And we have a US administration that will only be around a few more weeks. My advice is to hold on.

David O.

3:17

Roger, New to your service...need income. Wow, most stocks bid way up there...low dividends...WEC, XEL,NEE, etc. Have gotten som EIX...good advice...thank you.

How crazy would I be to get a small position in Pacific Gas and Electric now, and anticipate a decent dividend in 3 or so years?

Roger Conrad

3:17

I think buying PG&E under 12 and planning to hold for at least the next 2-3 years is a strategy that could easily double the initial investment. As you point out, there's no dividend now and won't be for at least a few years. But the company--as well as Edison International--appears to have weathered two of the worst wildfire years in California's history in 2019-2020 without significant new liabilities, such as those it suffered in 2017-18. And that's the best possible sign its recovery is on track. The real growth here is going to come from rate base investment in the company's power grid, which is critical for California to achieve its aggressive decarbonization goals. That includes being able to accommodate more renewables, electric vehicle charging stations and of course hardening the system against future wildfires. And it's fuel for rapid earnings growth at PGE, once this company can show it can withstand wildfire season.

Don

3:28

Hi Conrad,

Is investing in Energy is dead like so many pundits have said. Is there a long term future of the midstream business and how does that translate to MMP, MPLX, ET, and EPD.
What are the greatest risks to your coverage universe assuming a Biden presidency and the possibity of a Democrat Congress.

Thank you as always.

Roger Conrad

3:28

I could not disagree more with the idea that best in class energy midstream companies are dead money--even if Democrats do win the Senate. Frankly, it's an idea straight from one side's overheated campaign rhetoric that investors swallow at their peril.

Yes, this has been a tough industry to make money in this year and in fact the past few years. But its economics that's caused producers to pull in their horns and midstream companies to adjust. And now those economics are changing in a favorable way--it's time to buy stocks like MMP, MPLX, EPD--and even ET despite the Dakota Access Pipeline controversy--not run for the hills.

Before the November vote, Bloomberg Intelligence issued a report handicapping 9 possible policy changes resulting from election results. At this point--with a narrow Senate majority depending on moderates regardless of party control--only 4 have better than 50-50 odds. One is tighter control of methane emissions, which industry supports and is already making happen.

Roger Conrad

3:30

The others involve tougher permitting for new drilling and midstream projects including LNG export facilities. But if you've been following the industry the past few years, you know the place new projects have gone to die has been the courts, where well-funding opponents have been able to pick an easier permitting process apart at the cost of billions of dollars to would be developers.

3:34

I think you can make a good case that a tougher federal permitting process will actually make it more difficult to sink new projects in court--thereby making federal agencies the primary forum for winning approvals. That in turn could make it much easier for developers to quantify risks. In any event, producers and midstream companies are cutting back their CAPEX now in earnest--so it's hard to see fewer federal permits granted really affecting companies' profitability. And ultimately, when there's less investment, there's greater scarcity. Keep in mind that for every pipeline project blocked or asset that gets shut down on tighter rules actually increases the value of everything else left.

3:35

Bottom line: Don't let overheated election year rhetoric scare you out of stocks of companies that have proven resilience in the worst market to hit their industry perhaps ever, certainly in memory--and just when the cycle appears to be bottoming.

Dragomir

3:40

Hi Roger,

Excluding NEE, NEP, HASI, BEP (all overpriced) which companies are investing aggressively in renewables as they wean themselves from fossil fuels? Regardless how dependent we are on fossil fuels and will be for some time the future IMO is in renewables. Thanks for your excellent market letter.

Roger Conrad

3:40

I'm happy we were able to bring all of these stocks to readers attention the past few years--and that they've done so well. My contention all along has been if you wanted to bet on renewables growth the best bets for conservative investors by far would be companies that could adopt the technology most effectively--rather than developers or manufacturers. I think all of these companies continue to do this very well. And I think all of them are going to continue to grow as what EEI calls the "energy transition" continues to cleaner fuels.

I agree with you that these stocks have become quite expensive--and that we should wait on dips to buy more. The price difference between Brookfield's partnership units BEP and its C-Corp shares BEPC only makes sense if you consider how wacky market structure has become at this stage of the bull market in some sectors--it certainly has no economic rationale as they pay the same dividend, have same ownership etc.

Roger Conrad

3:41

I do think there are areas of renewable energy growth that have yet to be "discovered" by investors. I highlighted offshore wind development as one--with the idea that the Bureau of Ocean Energy Management cease being an impediment to investment next year. And I'll continue to be on the lookout for opportunities.

3:43

That said, as I've noted here, I don't think the game is over for oil and gas either--in fact, from these deep value prices they are clearly not pricing in the kind of cash flow these companies are going to take in and distribute in dividends the next few years. I think there's a huge buying opportunity here, though I do agree renewables are where the growth is if you're looking out the next few decades.

Lawdap

3:55

I've sadly held on to my SPH. Would a premium to the current price be a reasonable expectation, or fantasy, if a takeover materializes?

Roger Conrad

3:55

When the November issue of CUI went to post, I rated it a sell. I was concerned we had not yet seen Suburban Propane's FYQ4 and full year 2020 results and guidance update--and that shares had perked up to a high teens level that put them at risk.

As it turned out, there were few surprises and some good news--especially on the cost cutting front, which reflected both management's efforts and additional scale. But overriding everything was more evidence of how this business remains challenged by milder weather--magnified this year by fallout on the economy from the pandemic. On the plus side, distribution coverage is better than 2 times, which should rule out another dividend cut this year. And I continue to believe this company will eventually be taken over, possibly by still expanding Superior Plus.

With shares back in the mid-teens again, I don't think there's an immediate to sell SPH. If they surge back to the high teens, they may again be ripe for a sale. But at this point, I think they're fairly value

Guest

4:00

Having bought into pipeline companies years ago (PBA, KMI, MMP) I'm looking at significant unrealized losses. What will have to happen to get these stocks back into profitability.

Roger Conrad

4:00

I think we'll see a strong recovery over the next 12 months as it becomes clear that energy prices have already hit bottom for the cycle--and that activity has stabilized. The end of the pandemic is probably a prerequisite for that. So is a calming of investor fears that a prospective Biden administration has the desire as well as the ability to place harsh new restrictions on oil and gas usage. But while these companies have had a terrible year as stocks, they have proven their resilience as businesses. In every previous cycle, that's ultimately ensured their recovery and we don't see the coming year as shaping up any differently. They're also a lock to keep paying their generous dividends while we wait.

Lee B.

4:05

Roger,
I feel the need to broaden my renewable energy exposure. NEP and BEP have served me well. If you had to choose three more, for the long run, what would they be?

Roger Conrad

4:05

I would look to the prospective key players in US offshore wind. They're about the only renewable energy stocks that have been left out of the rally so far, mainly because the Trump Administration's Bureau of Ocean Energy Management has been moving the goal posts on project approvals for more than a year. A change at BOEM would unleash plans of Avangrid, Dominion, EverSource, Orsted, Public Service Enterprise Group and others--and I suspect catapult their share prices much higher. There are also yieldcos Clearway Energy and Atlantica--not as cheap as they used to be but still offering mid-single digit yields and mid to upper single digit annual dividend growth going forward with relatively little risk.

Ronnie P.

4:10

Having gotten into numerous pipeline companies some years ago (PBA, KMI, MMP EPD) I'm sitting on significant losses since the collapse of oil prices. By what scenario will these get back into the plus side.

Roger Conrad

4:10

Hi Ronnie. I answered pretty much the same question from another reader just a moment ago. But the bottom line is we need a recovery in the economy and probably a calming of the hysteria that a prospective Biden administration has the ability or even desire to do what they were charged with by the Trump campaign--i.e banning hydraulic fracturing etc. We see zero chance of anything that dramatic happening, even if Democrats manage to hold a narrow Senate majority next year. And anything short of that is going to be taken as a win for the industry given the current low level of expectations/extreme level of anxiety. In any event, the important thing is these companies you've named proved their resilience once again in Q3 results. That's ultimately the fuel needed for a share price recovery. And dividends are safe while we wait.

Terry

4:15

EXC - I live in IL and it is a disaster - no legislative action till spring and Byron / Dresden will close next fall, what should be done with holders of EXC

Roger Conrad

4:15

I think the stock price right now--as well as company guidance--already reflect those nuclear plant shutdowns as the most likely scenario. As management has pointed out, it's going to hurt Illinois consumers and businesses a lot more than it will hurt the company, which has been managing its nuclear fleet to maximize free cash flow since the middle of the last decade, mainly to fund its regulated utility franchise rate base growth.

If Illinois can pass that energy legislation in time and keep those plants economic and open, it should be a big plus for Exelon's earnings and share price. But the key thing to focus on now is the strategic review that's likely to result in the spinoff or sale of these operations. We should have a better indication of the result by early next year. But at this point, Exelon trades for just 14.3 times expected next 12 months earnings. That's a sharp valuation discount to sector leaders, and I expect to see it close as we get more details on the nuclear spinoff.

Marie

4:25

Dear Roger,My husband and I are retiring. We will have 500k after the sale to invest. In today’s environment-political and financial-it’s a little perplexing. What are we to do?

Roger Conrad

4:25

First, I wouldn't be in any hurry to invest everything at once. My own preference would be to plan to buy 15 to 20 stocks of best in class companies from a range of industries that are reliably increasing dividends--which over time will pull their share prices higher as well. Once I identified those stocks I would plan to buy in increments, with one-third of the total investment contemplated now, one-third in a month and the final third a month after that. That's the best way to keep emotions out of the equation, and it ensures one won't wind up buying everything at a short-term top, which can undermine patience.

There's the option of employing someone to invest for you. But I really think are better off doing the job themselves, provided they're willing to put in the work to find good stocks that suit their needs and manage their holdings.

Note that I do have a CUI Plus portfolio that we do run as an actual portfolio--with specific numbers of shares recommended etc. It's balanced and diversified.

Roger Conrad

4:26

If you're interested in seeing it, please give Sherry a call anytime 9-5 ET Monday through Friday at 1-877-302-0749.

Larry

4:32

Followed you over from KCI including Canadian Edge and Utililty Forecaster. Which company do you think is a better buy for a retirement portfolio at this time? Pembina, Enbridge, or KMI or another choice I have not considered. Thank you.

Roger Conrad

4:32

Thanks Larry, we've really appreciated your business since we went independent. It was not an easy decision to leave a company after 27 years working for them and I still have fond memories. But it's definitely been more interesting and rewarding to work for ourselves.

I actually think all three of those companies are fine for a retirement portfolio in need of more midstream exposure. Enbridge is the most diversified, with its extensive portfolio of oil and gas pipelines as well as renewable energy generation and regulated utilities. But all three of these companies have proven themselves as very resilient. Pembina and Enbridge are priced in and pay dividends in Canadian dollar, which I think will be a plus going forward but will make them more volatile than Kinder all else equal. Other than that, all three are very cheap and I think in good shape for a big rebound next year. Another you might take a look at in conservative midstream is Williams Companies--contracted gas pipelines with utilities.

Paul

4:37

Roger, thanks for all you do. I know you like MLPs and I have just gotten tired of their tax filings. I know it won't be as good as your individual picks but what about MLP etfs? Are you for or against. Have a favorite among them?

Roger Conrad

4:37

I've generally avoided MLP ETFs because they tend to just be everything, with the heaviest weightings in the companies with the biggest market capitalization--which aren't necessarily the best picks. As an alternative though, you might consider a closed-end fund that specializes in midstream companies--which are typically high yielding whether organized as MLPs or corporations. The risk is they usually employ leverage, which means when asset prices decline they can be forced to liquidate positions. And in fact that is what happened to Kayne Anderson Energy Infrastructure (NYSE: KYN) and Tortoise Energy Infrastructure (NYSE: TYG), with the result they both cut their dividends sharply this year. But in a recovery that leverage would work in our favor, especially as big discounts to net asset value narrowed. Again, more risk than buying individual names but also more leverage at a time when the cycle appears to have bottomed.

4:44

Would you say dream prices are "once in a decade" type prices or "once a year"?

Roger Conrad

4:44

They're prices only reached under extreme market conditions, or unless the underlying company is falling apart on the inside. They can go years without being visited. But as we saw in March of this year, when they do it can happen a lot faster than anyone expects.

Basically, I set them in a period of calm markets. And when they're reached, I make a judgment about whether the reason they're down will reverse--if the answer is yes I'm going to pound the table for them as buys.

One strategy for Dream Buys is to set buy limit orders at those levels. That way, if a price is reached, you don't have to be around to execute the position as it will be automatically. That's been an effective strategy over the years, with investors often realizing windfall gains in a matter of months as normal conditions return. I discuss Dream Buy strategy every month in the Portfolio Update section of the issue.

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