JotCast | 11/29/22 Capitalist Times Live Chat

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11/29/22 Capitalist Times Live Chat

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Elliott Gue

2:44

We have XOM as a buy under $85 and we have a "Dream Buy" at $80 right now. We still really like the company fundamentally, and regard it as a core long-term portfolio holding, but think it could see a significant dip in price as part of a market-wide sell-off. In today's issue we recommended taking partial profits on XOM -- I strongly suspect we'll be issuing a flash alert or update as part of an issue at some point in 2023 recommending buying back shares of XOM on a dip in price.

Roger Conrad

2:44

Q. Please discuss the “cap” issue that the Europeans are debating and its implications for WTI and energy stocks.
1. Does a future possible Chinese lockdown affect the oil price over the longer term?
2. 3. Do you see EVA’s dividend as being safe? There have been several reports out recently saying it is unsustainable.
Thanks as always.—Ken V.

A.Hi Ken. I’ll address the third. My view when Enviva (NYSE: EVA) was at a much higher price is that it was too expensive to be a good buy. When I look at company news under Bloomberg, what jumps out is the truly massive number of shareholder lawsuits against the company, alleging management overstated cash flow and misrepresented the environmental sustainability of its wood pellet production and procurement as well as business model and ability to achieve management’s growth targets.

2:45

My honest opinion is those who bought at 90 got carried up in green investing hype and are paying the price. The company’s guidance and results have in contrast been very steady, aligning with what’s have been pretty consistent projections for such an unsettled environment. And dividends have continued to grow, up 7.7% over the past 12 months.

I think there are probably limits to wood pellet markets’ growth in the future—given that coal to mix them with is still likely to be phased out in Europe and Asia. But given the fact the company basically collects scrap wood and turns it into saleable product for energy-starved markets, management should have levers to pull to keep growing at a modest pace—as it has been. I still rate the stock a hold.

Cliff W.

2:50

Follow up to last email
just some feedback - really appreciated your showing % of the 100k used for each stock.
would be helpful in the future to retain a column showing that % allocation per stock, useful as guide for our own portfolios

Keep up the good work

Elliott Gue

2:50

Thanks for the feedback -- always appreciated. As part of the portfolio rebalancing and rebasing we did, we also created a series of spreadsheets that make it more straightforward to track and report on our percentage allocations to individual names and energy sub-sectors (i.e. upstream, majors, refiners and midstream). I agree, regularly reporting on the percentage allocations would be a useful addition -- I'll make a note to include it in upcoming issues.

Jon B

2:53

Hi. Displaying EIA portfolio holdings in terms of percentages is a good change and (presumably) shows what stocks you have most confidence in. Question: Do you have any additional insights into what is going on at Altagas? Q3 earnings, though underwhelming, seemed to just reflect unusually high logistics costs and lower than expected spreads, both of which seemed to be turning around in the company’s favor. Utilities have recovered from their early-fall correction and Altagas’ export business should be in the sweet spot. However, recent stock action reflects neither and in fact seems to indicate something bad beneath the surface? Thoughts? Thanks.

Roger Conrad

2:53

Thanks Jon, appreciate the feedback on the new format of Energy and Income Advisor. Hope everyone has had a chance by now to check out the new issue posted today, which does include some important changes in allocation. Look for more by the end of the year.

Regarding Altagas, the most important news with Q3 results is the company maintained its full year guidance range, including its longer-term projections for earnings and dividends. That indicates management's expectation for the business is on target, both regulated utility and midstream. So far as the action in the stock, I think you have to put it in context of the overall market (down), magnified by a weaker Canadian dollar and the TSX. All 15 analysts tracked by Bloomberg rate it buy and insiders have increased holdings by 18.5% the last six months.

Jeff

2:55

Roger I know you have a sell on TDS. I own the preferred. Do you think there is any chance they will go bankrupt?

Roger Conrad

2:55

Hi Jeff. No I don't TDS is going bankrupt. But the possibility of a dividend cut has grown with sales under pressure from inflation/recession/competition and the company needing to access the debt market to fund broadband and 5G buildout. Interest on the preferred must be paid so long as the company pays a common dividend.

frank d

3:00

What do you think of the article by Mark Hulbert in "Market Watch" that energy stocks have a 80% chance of falling 40% or more in the next 2 years based on research by Greenwood et al published in the Journal of Financial Economics in 2017?

Elliott Gue

3:00

Basically, the idea presented in the paper is that when a particular US market sector beats the broader market by a large amount over a 2-year lookback window, there's elevated probability of a major pullback. The basic concept is really nothing new -- in the 1990s when I was in graduate school we studied the concept of "mean reversion" which basically is that financial market relationships that depart from long-term "average" levels tend to revert to average over time. However, there are a few points to keep in mind -- energy's massive outperformance since 2020 follows a period of equally massive underperformance. So, I'd argue the rally just represents a reversion to the long-term average weight of energy within the S&P 500. In other words, the "bubble" isn't energy's recent outperformance but the six years of massive underperformance from 2014 to 2020. Further, our approach to the financial markets is fundamental and our view is that the current cycle is based on inadequate investment in energy supply (new

Elliott Gue

3:00

oil and gas projects) since the 2013-14 peak. In the past 50 years we've seen two energy supercycles on the upside driven by supply -- the 1970s and 1998-2008 or 2014 depending on how you measure it). In those prior periods energy stocks outperformed the S&P 500 by larger percentages -- and for a longer holding period -- than has been the case the past two years. That's not to say there won't be pullbacks along the way -- in this week's issue we even recommended raising some cash to protect against that risk -- but our research suggests we're still in the early stages of a multi-year energy supercycle of performance.

Victor

3:07

Hello Roger. EPD, MPLX and MMP are still trading under or at the buy price. For someone who wants to add to these positions, would you wait for a drop or add more at this level?

Roger Conrad

3:07

Hi Victor. I think these are all great midstream companies and that current prices would be great entry points for long-term investors especially. EPD, for example is still selling about one-third below its 2014 high though its dividend is more than one-third higher. I think all of them will trade at much higher prices in the next 2 to 3 years. But as Elliott just replied to a question above, even the strongest energy super-cycles have pullbacks. And as we are looking for a recession that would almost surely push stock prices down, prices could go lower before they go meaningfully higher. Bottom line, we would take an incremental approach with new investment--and we would not be in a hurry. Look for more specific advice with the midstreams in the December issue.

Victor

3:10

Hi Elliott, You are recommending to sell approximately 50% of EOG and VLO for someone with triple digit total returns. Do you still recommend the same for someone with double digit total returns?
And also, your thoughts on FANG, MRO and DVN, would you take some profits at these levels?

Elliott Gue

3:10

Our recommendation to take partial profits on these names has more to do with 1. Their current valuations relative to our short-to-intermediate term targets, 2. The risk of a broader market pullback that produces collateral damage for energy, 3. The desire to raise some cash to deploy in other opportunities and/or reallocate to other sectors. So, it's not so much a function of the percentage gain in these names as that will depend on your exact entry point. Long story short, the names we've recommended selling are just names we think have gotten a little "ahead of themselves" short term. FANG, MRO and DVN aren't in the portfolio, but they are similar stocks to PXD and EOG, which are names we recommended booking partial gains on in the last issue. One other thing I like to watch when constructing a portfolio is the percent allocation to a particular name. For example, maybe you have a name that doubles in price over a year while the average stock in your portfolio is up just 25 percent

Elliott Gue

3:10

If that happens your portfolio's allocation to the outperformer has probably increased significantly. All things equal, I'd be inclined to at least sell down the position in some of those big winners to prevent portfolio overconcentration in a single name or group of names.

Barry J.

3:11

Roger, I'm eagerly looking forward to the next REIT Sheet. Can you tell us when it might be out?

Thanks.

Roger Conrad

3:11

Hi Barry. Probably tomorrow morning for posting the November REIT Sheet. By way of preview, my focus was on Q3 results and guidance from the Recommended REIT list. There were some nice, big moves last month but still compelling values.

Victor

3:19

Roger, ENB has good dividends but it hasn't gone up as others. NEP has been moving sideways this year, do you expect more of the same next year? Your thoughts

Roger Conrad

3:19

Moving sideways in a year like this one isn't a bad performance for NextEra Energy Partners, which has actually outperformed its parent NextEra Energy (NYSE: NEE). Both have been fighting a valuation problem this year, though they've given us several chances to buy well below my maximum recommended entry points: NEE as low as 67 and NEP at 61! I think the important thing for both, though, is they've been able to keep growing in a very turbulent year--despite supply chain dysfunction, rising inflation, higher interest rates, politics etc. And NEP's dividend is 15.1% higher as a result, while NEE's is up 10.4%. I see no reason they won't keep growing in 2023. So the key remains buying below recommended entry points--which has yielded solid gains.

As for Enbridge, the Canadian stock market has lagged and this company is priced in and pays dividend in Canadian dollars--which have come down against the US dollar. No reason to expect it won't make 5-7% annual DCF and dividend growth and looks cheap at 45 or less.

Victor

3:22

Hello guys and I hope you had a good and relaxing Thanksgiving! Elliott, how significant is the impact in oil prices due to the situation of China's lockdowns? The Saudis are already talking about cutting production. Your thoughts.

Elliott Gue

3:22

Thank you. Hope you had a great Thanksgiving as well. The China lockdowns impact oil demand, so it's a valid fundamental to watch for the oil market. The problem is that China's "COVID Zero" strategy is basically an economy killer -- especially with these newer highly contagious strains, it's next to impossible to prevent a billion people from spreading a virus. What we are seeing, in my view, is some efforts by the Chinese government to soften up their "COVID zero" strategy and quell unrest without losing face. Weakness on the demand side -- in China but also almost everywhere due to economic contraction -- is one reason why we've been warning of the potential for oil to pull back to that $70/bbl to $80/bbl range since last summer (it's now near that target). However, in the past, the supply side of the equation ultimately dominated cyclical demand factors. For example, in 2000-02, the global economy entered recession, there was a coronavirus outbreak in Asian in 2002 (SARS) and travel demand was also impact

Elliott Gue

3:22

-ed by the September 2001 terrorist attacks. Oil, and energy stocks, did pull back however the pullbacks were generally mild and then the market exploded to the upside in 2002-03 through 2008 because the supply side was so bullish (in sufficient new production to meet demand in a normal economic environment). I'd expect something similar this time around -- demand will cause dips in oil, but supply growth is just so weak the intermediate term trend will be higher. Regarding OPEC, the cartel can manage oil prices because they now (once again) control the world's swing supply and have been producing at near-maximum for most of this year. Roughly speaking, Saudi needs Brent near $90/bbl to fund their planned CAPEX on new oil and gas projects so I think they'll target near that level going forward. The lower oil goes short-term, the higher the probability they cut production further.

Roy W.

3:26

Roger, thank you for your valuable advice over the years. And thanks for taking questions, which is a much-appreciated service for subscribers. I am currently having trouble understanding two of your recent recommendations.

Your principle of raising cash by selling positions of companies with weakening businesses makes sense to me. But then you are recommending holding AQN, in your conservative portfolio no less. That company has had GAAP earnings declines in each of the last three quarters; has a high level of debt relative to cash flow; has recently lowered earnings guidance for this year; has sent a letter to shareholders earlier this month that obliquely hinted at a dividend cut; and has abruptly changed CFOs, which can foreshadow a cascade of bad news for shareholders. Why would you not sell AQN and reinvest the funds in a better situation?

Roger Conrad

3:26

Hi Roy. I won't repeat my comments on Algonquin from earlier questions, other than to say the stock is a pretty good example of what happens when multiple analysts covering a company shift positions at the same time. There has been a great deal of insider buying, which is encouraging. But again, I want to see some guidance clarification before I change my recommendation back to a buy. That's basically what everyone else is saying I know--which means if they can close and finance Kentucky Power and clarify guidance we'll see a strong recovery, but otherwise shares may sink even further.

At this level of valuation, I don't see much use in selling from a long-term investment perspective, given the price already reflects the worst case scenario of a sizable dividend cut. But there is a circumstance where it may make sense to sell losers to harvest tax losses by the end of the year--with the idea of potentially getting back in after 30 days to avoid wash rule penalty--something I do every December.

Guest

3:28

Elliott, BHI earnings were rather disappointing and the stock sold off a bit. Then, a couple of weeks later, it rallied from 22-23 to the 31. Was it a sympathy rally, joining SLB, or was there some other reason for the 10 point gain? Thanks.

Elliott Gue

3:28

Baker Hughes reported their Q3 earnings on October 19th and the stock was up about 6.1% in the one trading day following their release, just shy of 8% in the next week and 28% in the one month following that report. SLB reported on 10/21 and jumped 10.3% in the day after its release, while HAL reported on the 25th and was up just 1.2% following its EPS release. So, while I think BKR's Q2 2022 release back on July 20th was a miss and the stock sold off following that, their 10/19 results were well above consensus and the stock responded positively. More important, BKR's earnings report included some guidance that suggests the issues they had earlier this year -- their Russian business mainly -- have been fully discounted in the price. That was the initial driver of BKR's rally and I suspect SLB's very strong report highlighting, in particular, strong spending in the Middle East gave Baker shares an added kick to the upside.

Buddy

3:35

Elliott, Still too early for FTI? Thanks.

Elliott Gue

3:35

In the most recent issue of EIA we noted that we've become increasingly bullish on the services and equipment names and started by boosting our recommended allocation to Baker Hughes. The reason is that we've previously only recommended a small position in Baker with SLB remaining our top services pick. We also mentioned that we're eyeing a number of new service/equipment stocks to add the the portfolio and I can tell you that FTI is one of those names. Basically, we're starting to see enough evidence that the offshore cycle is firming up -- mainly in Q3 calls from companies like SLB -- to warrant a closer look at names like FTI.

Roy W.

3:36

And in CUI+ you recommended selling CSCO. That company recently reported earnings above analyst estimates and raised earnings and revenue guidance for the remainder of the fiscal year. Management identified specific tailwinds for earnings going forward, while the company has a strong balance sheet and sells at less than 14 times earnings. CSCO seems to score high in your five quality criteria. If you want to raise cash, why not sell AQN and hold CSCO with its strengthening business operations? Or are you inclined to sell any cyclical company if recession risks rise, regardless of the strength of its business?

Roger Conrad

3:36

We like to buy low but also sell high. We added Cisco to CUI Plus because it occupies a very strong niche in the info tech space--cyber security--and because it generates massive amounts of free cash flow. We harvested the gain we had at a price slightly below the current level following a flurry of good news and strength in the overall stock market--rather than take a chance on seeing it unwind in a prospective recession and resumption of the market selloff due to the company's more cyclical businesses.

We did the same with several other winners with the result we've now taken meaningful gains in seven positions this year. What's left to do will be balancing those by taking some money off the table in some of our losing positions--including some that we may like for a comeback. This will raise our cash further, which we'll look to deploy next year.

Eric F

3:39

Roger, I’m interested in your view on AQN now that it’s down. Since you liked it before, is it an even better deal now? I started a 1/3 position at this new low

Roger Conrad

3:39

Hi Eric. I've pretty much said all I can say about Algonquin answering earlier questions in this chat, as well as in the November issue. I think you have the right approach to investing in this market--the incremental by thirds approach. But like I said with Algonquin, I'm not comfortable advising anyone to commit fresh money even at this price, until they clarify guidance particularly on dividend policy. Comfortable holding, just not adding to positions until then.

Lee O

3:46

thoughts on pbr

Roger Conrad

3:46

Hi Lee. Brazil just had a pretty consequential election for energy. Whereas the former president was pretty consistently supportive of the country's oil and gas industry--including pre-salt off the coast--the new one firmly committed to the energy transition, and he's stated he wants an overhaul of Petrobras' strategic plan. That could be a positive for investors, if the government follows the same track as France (TotalEnergies) and Norway (Equinor). But it could also be painful, with massive changes for management and CAPEX and a huge corresponding hit to earnings and dividends. The devil will be in the details. And you can make the case a lot of bad has been priced in with the stock yielding 23% plus. But at this point, we'd consider the stock a hold until we know more--particularly with so many high yielding bets in the US energy sector.

Guest

3:52

Hi Roger, Thanks for holding these chats. I see utilities have suffered quite a bit recently. Have they become good buys in the environment of rising rates with a high risk of an oncoming recession? What are your thoughts on Utilities in general and D in particular under $60 with >4% yield. Alternatively, is there another utility you like better? Also interested in your view of AQN

Roger Conrad

3:52

And thank you for participating today. I think utilities still have much in their favor in late 2022--onshoring of capital and manufacturing, a history of recession resilience, ability to pass on rising costs (inflation) to customers, a massive potential investment opportunity in renewable energy with government mandates and historic subsidy, a still generally favorable regulatory environment post the 2022 elections and now lower valuations than we've seen in some time. What happened to shares of Algonquin and Dominion this month shows the danger of companies raising doubts about guidance earnings and dividend growth. And though the sector was having an up year until mid-September, these stocks are not immune from market selloffs--especially as investors start to worry about the impact of higher interest rates. And we could see lower prices still if the recession we expect drives down the stock market (likely). But I like the longer-term with the sector. And D, AQN and others already trade at bear valuations.

Mike C.

3:58

Good afternoon –

Congratulations on CT’s 10th Thanksgiving – it’s impressive and much appreciated by this subscriber. And thank you for the newly released Energy and Income Advisor. The revised portfolio and profit-taking guidance are very helpful.

I’d love to hear your updated thinking on metals companies (either in today’s chat or in an upcoming newsletter). I keep hearing how copper supply is extremely constrained, and likely to be the tightest in years (once we move through recession and growth resumes).

Also, I continue to see a lot of forecasts (including one of Elliott’s five core theses) that we’ve seen peak USD, and have seen a variety of approaches to play this, including gold, EM bonds, other currencies via ETFs. What are your thoughts regarding investing or trading around a weakening dollar?

Elliott Gue

3:58

Thank you, we're very excited to have passed the 10-year mark here at CT. And thank you for the kind words about the service and the portfolio changes. That's one reason we like holding these chats; the feedback we get from readers really does help us identify and implement changes to the service that make it more useful. The dollar index has been very, very strong lately -- in fact, the DXY index reached the highest levels in 20 years at its late September peak. Even better, take a look at the Japanese yen -- at the dollars peak this year it bought over 150 yen, the last time that happened was more than 32 years ago in August 1990. The last time the yen traded above 150 for any length of time was the mid 80's. So, the dollar was stretched to the upside earlier this year to say the very least. Moreover, this autumn with the dollar reaching multi-decade highs, I started reading analyst reports from the big banks predicting 160 or 180 yen to the dollar, and start seeing the CFTC reports showing huge long dollar

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