JotCast | 12/28/23 Capitalist Times Live Chat

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12/28/23 Capitalist Times Live Chat

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JIM

2:39

Concerning OUT a reit. Is this a B_S_H. Is this an opportunity or a pass. I am up huge on my purchases in Sep/Oct and it is still climbing.

Roger Conrad

2:39

Hi Jim. Outfront Media is one of the more cyclical REITs in our REIT Sheet coverage universe. We currently rate it a hold. Q3 results as I note in current issue comments were weak, with operating income lower by -21.1% from a year ago as transit revenue declined by -7.6% and adjusted FFO per share dropping by -12.5%. The dividend was still well covered. But the fact the REIT is selling assets--Canada operations went to Bell Media for CAD410 mil--indicates cash is still at a premium.

The stock will likely finish the year underwater. It has surged along with most REITs since October. The dividend appears in no immediate danger, despite still being below the pre-pandemic rate. And the digitization of billboards is a potential avenue for growth. But if there is a recession next year, we can look for further revenue declines and balance sheet pressure--which is why we rate the stock a hold now.

Sandy W.

2:46

Hi Roger,

I owned FUN for several years and sold when the market went down and the dividend stopped. I see the dividend has been reinstated and it's merging with Six Flags. Is it a buy at this stage?

Also saw an article that Alteria may get into selling cannabis cigarettes. Any thoughts?

Roger Conrad

2:46

Hi Sandy. Altria was less than successful with its previous cannabis efforts. But that business has matured the past several years and their current moves seem to be getting more traction. Certainly, they're no stranger to dealing with tightening health-related regulation--which is increasingly vital in this sector. And as it continues to gain market share, Marlboro looks more than more like it will be the last brand standing--as it continues to demonstrate the ability to raise prices as well. I don't think anyone should consider Altria a growth stock. But with a yield of almost 10% and a clear path to sustainable annual dividend growth of at least 3-5%, it certainly has a great value proposition.

As for Cedar Fair LP, I have not tracked it for a number of years--and it's been a bit less resilient than some of the hospitality REITs I track in the REIT Sheet. it appears to be on the right track now. But the dividend is still less than a third of what it was a couple years ago.

Sohel

2:47

Hi Elliot, Was wondering if you still think a recession is in the cards and when? Also, given the seasonal lift we have had - will the recession drive a steep market decline soon?

Elliott Gue

2:47

Yes, I do think a recession is coming. As I outlined in response to a question a bit earlier in the chat today, the Fed Funds futures are pricing in 7 rate cuts by January 2025 -- I can't see the Fed cutting that aggressively without a looming recession. Indeed, i believe we're already seeing signs of creeping economic weakness in various economic series as well as corporate earnings (Wal-Mart's last report is an example I wrote about recently). Normally, the stock market sells off when a recession comes into view even if the Fed cuts rates, as it usually does. I see no reason to believe this time is different. Timing is tough to say -- right now, the market is awash in liquidity, so the path of least resistance is higher into early 2024. I will continue to monitor market liquidity by watching bank reserves and credit conditions and of course the incoming economic data -- these factors usually give us some warning of trouble ahead before the market tumbles.

Roger Conrad

2:49

Continuing on Cedar Fair, there's also some opposition to the Six Flags deal, which forced the parties to refile with regulators. But this does look like a good deal for both parties.

JT

2:54

Hi Elliott, do you still like TLTW?

Elliott Gue

2:54

Yes I still like TLTW.
As I've mentioned before on these chats I am not a believer in the "higher for longer" interest rate narrative that was all the rage back in October.

My view since last summer has been that the Fed's next move would be a cut -- that was out of consensus a few months ago though not so much at this time.

Generally, I think bonds could perform well as a recession comes into view as part of a flight to safety trade.

TLTW is basically just long bonds (the 20+ Year Treasury ETF) with a covered call overlay. Those covered calls supercharge the income from this ETF.

Next month I will be dramatically expanding my coverage of fixed income/bond ETFs as part of a report I'm working on and will likely have some additional recommendations.

Sohel

3:02

Hello Roger, Thanks for holding these chats. On the REIT Sheet I notice you prefer NNN vs O. Could you explain the rationale and is one of them a currently a better buy at current prices?

Roger Conrad

3:02

Hi Sohel. I like NNN REIT as a retail REIT for several reasons. Its primary locations are in the more resilient parts of the country economically where regulatory risk is lower, particularly Texas Florida. Management has also done a great job navigating tough markets/economic conditions, consistently raising dividends in tandem with steady portfolio and cash flow growth. Strong performance was most recently demonstrated by increased guidance following Q3 results.

Realty Income also raised guidance and can say much the same. Per the REIT Sheet table of all REITs, I recommend O as a buy at 70 or less with NNN up to 50--so both are buys and I have favorable comments on both as well. They yield about the same and are growing dividends at the same rate.

The answer to your question is I had to pick one of these very similar REITs. So I chose the much smaller NNN (market cap $7.9 bil) as a possible takeover target with O ($42 bil) a likely eventual suitor.

Sohel

3:02

Hi Elliot, 1. What is your outlook on interest rates in late 2024? Preferred securities have done very well over the past few weeks recovering all the losses since October and then some. During the last chat you had expressed concerns getting into preferred securities. 2 Do you still have that concern?

Elliott Gue

3:02

Thanks for the question.

I believe the Fed will be cutting rates by next spring and cuts will continue as a recession comes into view.

I don't have a bearish view on preferreds across the board. I am worried about the fact that most of the preferred ETFs have a heavy focus on preferreds issued by financials. In particular, I see the recent surge in the Fed's Bank Term Funding Program (BTFP) and I wonder if there's some hidden stress in the financial system. So, that gives me some pause.

Also, while preferreds have done well this month, we have seen some pretty big rallies across the fixed income waterfront. For example, PFF, an ETF that tracks preferred shares -- is up 3.43% this month including distributions. But, IEF (7 to 10 year Treasuries) are up 3.97% and investment grade corporate bonds (LQD) are up about 5.2%. So, I still see areas within fixed income that look more attractive right now perhaps with less risk.

Victor

3:11

Hello Elliott, Some economists are bullish on oil in the medium and long term, precisely because the ESG movement, including numerous governments, is limiting both the amount of money and places that can be drilled for oil and gas. Economics 101 says that if you reduce a supply of something that has an increasing demand the price is going to rise.
Felix Zulauf and others are about $120‒$150 oil next year. In a normal world, that shouldn't happen, but John Mauldin agrees with this. Is this a realistic forecast?

Elliott Gue

3:11

I agree with the reasoning. We sent out our year-end roundtable for 2024 yesterday and I mentioned a report put out by Goldman early this year. They estimate that the cost of capital for traditional energy projects is 15 percentage points higher than for low carbon projects.

That's incredible! If you're like me, you've probably ready hundreds of articles in the past 12 months about fed rate hikes and the rising cost of capital. Well, 15 percentage points dwarfs anything the Fed has done in the last 40 years.

So, that's definitely limiting the investment that could bring about new supply and put downward pressure on oil and gas prices. It's also lengthening (and worsening) the supercycle for energy prices.

I think $120 to $150 is too aggressive, particularly if we have a recession as I expect next year. Certainly longer term I think you could see that -- maybe even higher.

In my view the biggest upside catalyst for oil into H1 2024 will be the realization that US production isn't growing as people

Elliott Gue

3:11

believe. This is because of a change in the way EIA estimates production starting in June 2023 plus some bump in drilling activity from private companies trying to attract a favorable valuation in acquisitions. My view is that the Permian Shale,. in particular, is a lot closer to a peak than the consensus believes.

Victor

3:14

Hello Gents and Happy New Year! Roger,
several people are asking about NEP. We can see that it is slowly recovering from the October lows. Do you believe that all the bad news are behind us and that this uptrend is sustainable? What can derail this new uptrend?

Roger Conrad

3:14

Hi Victor. I won't minimize the bad news on NextEra Energy Partners (NYSE: NEP)--mainly, when parent NextEra Energy's (NYSE: NEE) shelved a planned drop down/asset sale this fall, it was a tacit admission that NEP was not a viable funding vehicle. What I think many people missed at that time was that NEE did not view that as necessarily a permanent state of affairs. In fact, with its massive CAPEX needs to build out renewable energy, management was committed to supporting NEP until capital markets improved enough to resume drop downs. The sale of NEP's gas pipeline assets, NEE's suspension of IDRs and the successful sale of $750 mil in 5-year notes have basically settled NEP's liquidity needs until 2027. NEP will have to return to capital markets by that time to avoid asset sales and possibly a dividend cut as more obligations come due. And I think that's good reason not to pay more than $30 for shares now. But on the other hand, capital markets are already improving--so I fully expect to adjust that number.

JIM

3:16

How high will kold go? Is a short or puts reasonable at this level?

Elliott Gue

3:16

Currently the KOLD ETF holds March 2024 natural gas futures, which are at $2.384/MMBtu. Right now, the news on gas has been pretty uniformly bearish (warm winter) and the bad news is priced in. I'd say the probability of an event (like a cold snap) that sends natural gas prices significantly higher into early 2024 is higher than an event that sends gas prices lower.

I have been looking at some put options spread trades on KOLD for my options trading service -- only problem has been the extreme levels of implied volatility priced into that ETF.

Right now, mainly have been recommending the gas producers rather than the ETFs for trading gas.

Sohel

3:21

Hi Roger, Have REITs overshot on the upside and do we expect a pull back particularly if recession fears hit again? Should we take some off the top?

Roger Conrad

3:21

When I posted the last REIT Sheet a week ago, several Recommended REITs were selling well above my highest recommended entry points. None, however, were selling for more than the "Consider Taking Profits" prices I've set. And I would continue to use those as a guidepost for taking money off the table.

There are also multiple REITs that have been rising recently despite business fundamentals continue to weaken--such as financial REITs, most medical real estate and office REITs. SL Green shares, for example, have risen this month despite a dividend cut, which to me says shares are being pushed up by money going into index ETFs. And any REIT in that category should definitely be sold now.

Victor

3:23

Elliott, In one of your services you mentioned that bonds will present new opportunities in 2024. TLT made a significant move since its November lows and it is now above its 200 day MA. A lot of this has been speculation that the Fed will cut rates. However, if the Fed doesn’t act as it’s anticipated then the bond market will be impacted. I don’t know about you but I feel very skeptical about the Fed. Your thoughts.

Elliott Gue

3:23

In my view the Fed will cut rates significantly in 2024 as a recession comes into view. Indeed, their recent rhetorical "pivot" makes me wonder if the Fed itself is already seeing some signs of stress in the system and is trying to get ahead of that.

The way I look at the long bond is that we've done a round trip since last summer. First yields jumped on what I believe to be a faulty narrative of a soft landing. Then they have retreated as some of that higher for longer narrative has been reversed. I still think there's more upside (downside in yields) in a recession as part of a safe haven trade.

Sohel

3:27

Hi Elliot, Are you still bullish on SWN? What is your recommended entry point? I don't see it listed in EIA.

Elliott Gue

3:27

Yes, we still like SWN. We have it in one of our trading services (CT Trader) but not in EIA at this time. The main reason is that we already recommend CHK and EQT in EIA so the model portfolio has plenty of gas exposure in our view. CHK is a similar story to SWN and is a less volatile name with a cleaner balance sheet. Indeed, I think CHK is likely to acquire SWN at some point in the next 12 months.

Eric

3:27

EPD has underperformed the MLP index AMZI since reporting earnings. Is that underperformance justified or do you think it will bounce back relative to AMZI over time?

Roger Conrad

3:27

Hi Eric. Enterprise has returned about 19% this year, which compares to about 26% for the Alerian. That's real money but not enough underperformance to really draw any conclusions. There were some analysts who apparently didn't like the $3.1 billion of new Permian Basin projects the midstream company announced--presumably because of capital market concerns. But all of these projects are heavily contracted and Enterprise has a solid record of executing on time and budget--which means no one should really be worrying about the returns on investment. Nor should anyone sweat the 5% plus dividend growth rate management has committed to, or the balance sheet that's now rated A- by S&P and A3 by Moody's--the highest in the MLP space.

In 2022, EPD had an almost identical return (18.6%) to what it's likely to end with in 2023. I'll take that every year, especially since close to 8% is locked in by the rising dividend alone.

Sohel

3:34

Hi Roger, I have a decent count of ET ... it seemed to doing well then got stuck in the 13 range. What is your outlook for 2024 for ET. Also, EPD seems stuck at 26 - any comments?

Roger Conrad

3:34

I think Energy Transfer is having trouble breaking over $14 largely because so many investors expect another large acquisition next year. The company has successfully boosted per share cash flow with every deal its done the past few years, including already Crestwood closed in early November. But many would seem to prefer more aggressive stock buybacks. I think management has resources for both and will have plenty to say in mid-February when Q4 results are announced. And as I've said, this stock has a lot of room to run, trading at barely one-third the previous cycle high. I expect another strong return in 2024, which should be a better year overall than 2023 for energy.

As for Enterprise, I commented extensively in Eric's question. Bottom line though is I'm bullish on both ET and EPD this year.

Guest

3:37

Hi Roger: Apologize in advance for this dumb question - but when you recommend buying Equitrans "up to 10 or less" from yesterday's Energy 2024 Roundtable, are you referring to the stock with the symbol ETRN? Does it make any sense to buy EQT Corp as well? Thanks. Barry

Roger Conrad

3:37

Hi Barry. Yes I was referring to the midstream company Equitrans (NYSE: ETRN)--which I think is an emerging takeover target with EQT as a potential suitor. We do have EQT the oil and gas producer and former parent of ETRN as a buy in the EIA Model Portfolio at 40 or less. And it is selling for a bit less than that today, making a great entry point for anyone who doesn't already own it.

Guest

3:39

Roger: A few months ago you recommended purchasing PAGP as a potential acquisition by one of the larger Midstream MLP's. In yesterday's Energy Roundtable, you referenced PAA as a potential target. Which company do you recommend us to invest in? Thanks. Barry

Roger Conrad

3:39

Either one will pay off big if the Plains family becomes a target. Plains All-American Pipeline (NYSE: PAA) is the operating company. Plains GP Holdings' (NYSE: PAGP) only asset is 33.19% of PAA. We've held PAGP in the Model Portfolio. But for all practical purposes this is the same bet--dividends are the same as well.

Guest

3:45

Roger: Can you tell us more about NS? It was so volatile and dropped in price so greatly few years ago that I sold my interest for a substantial loss. I know you tell us NOT to purchase a stock just for merger/acquisition purposes, but I have not ever seen you recommend NS for us readers to buy in the last few years. I think at 1 time it was on your endangered dividends list. Should we readers be seriously acquiring some NS based on yesterday's Roundtable? Thaks. Barry

Roger Conrad

3:45

I think NuStar Energy LP (NYSE: NS) should be able to cover its dividend at the current level next year. And its growing base of assets in the Permian Basin could definitely make it a takeover target at some point. The biggest problem this company has is debt--which is $4.3 billion plus versus a current market capitalization of $2.3 billion. Cutting the dividend in early 2018 and again in early 2020 did save a lot of cash to reduce debt. But nearly half the current debt is at variable rates--which has hurt this year. And refinancing the $168 mil maturing in 2024 may be challenging, depending on where bond yields are.

I guess my overall view on NuStar is I'd much rather own Energy Transfer or MPLX, which actually yield more and are increasing payouts. And as for a takeover, I think ETRN is more compelling.

Guest

3:49

Roger: Happy new year to you and Elliott!!! MPLX continues to stay above $35/sh. for many months now. I think at one time you were considering raising its buy price up to $36. Has there been any change? Barry

Roger Conrad

3:49

Yes, it's one we always look at to bump up. I was impressed with the dividend increase--right in line with what they did a year ago. And I think we'll see more of the same on CAPEX plans and operating results on Jan 30, when they announce Q4 results and 2024 guidance. That's also when we will consider another boost in the buy target, which last traded under $35 in early October but nearly made it there in early November as well.

Guest

3:55

Hi Roger: In your REIT Sheet a few issues back, you removed CCI as a recommended company for us to purchase. But in last week's expanded issue, I saw CCI listed as a "buy" below 150. Are you back now recommending it as a buy? If so, do we still have the same "dream price" as before? Thanks for your ongoing advice. Best, Barry

Roger Conrad

3:55

Thanks Barry. I apologize for that. To clarify, the current advice for anyone still in the stock is a hold. i think we can expect weak results for Q4 and the rest of 2024 as the US Big 3 telecoms see peak CAPEX, DISH Network largely fails to fulfill expectations as a fourth competing national wireless company and T-Mobile shuts down systems operated by the former Sprint. That means a frozen dividend for at least a couple years, though the company should have the resources to maintain it.

As a general note, we publish a lot of numbers at CT. Inevitably there are sometimes errors. and we truly appreciate when readers point out an incongruities with an email to service@capitalisttimes.com

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