JotCast | 12/30/21 Capitalist Times Investing Live Chat

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12/30/21 Capitalist Times Investing Live Chat

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Elliott Gue

4:25

We rarely recommend shorting stocks in Energy & Income Advisor (EIA) or in our other long-term services -- we have, fropm time to time, used inverse ETFs to hedge our exposure in these services. We do recommend shorting stocks in our trading service, CT Trader and/or buying inverse ETFs. In our options trading service, Income Options, we also frequently recommend trading the downside in stocks and or indices. We don't really see a lot of short candidates in the energy patch right now -- in both CT Trader and Income Options we have played the downside in natural gas prices over the past 2 to 3 months, but as I outlined in our issue this week, we think gas is close to a low and we're exiting those positions for a profit. In CT Trader we recommended shorts in ARKK some time ago (at higher prices) and in Income Options we've been trading several names on the short side of late including retailers like Foot Locker (FL), CarMax (KMX ) and Academy Sports (ASO). Also calendar put spreads in SNAP.

Jeff

4:26

Happy Holidays, Could you give me you opinion of 2022 on KMI,AWK, and SJI? SJI was in the portfolio then a sell and now I see it has a buy under price.

Roger Conrad

4:26

Hi Jeff. I swapped South Jersey Industries (NYSE: SJI) for Atmos Energy (NYSE: ATO) at the beginning of 2021 in the Conrad's Utility Investor Portfolio, because I saw ATO having better growth prospects with less risk and selling at a similar price. As it turned out, SJI has returned about 26% this year while ATO's is 22 percent--so not much difference, even though Atmos wound up facing a much greater challenge in Winter Storm Uri in Texas. I continue to believe ATO is the higher quality company and that SJI faces additional risks from regulators in New Jersey as well as unregulated operations. But at this point, both still look cheap and SJI is a buy up to 25, while ATO is up to 105.

I have talked a bit about Kinder during this chat. Bottom line is I think the company is well-run, financially strong, pays a safe and rising dividend and is well positioned for an eventual volumes recovery--a buy up to 22. American Water Works is a very high quality water utility but also quite expensive at 43 times expected

Roger Conrad

4:26

next 12 months earnings and a hold on that basis.

Hans

4:28

Elliott, I still have ENLC (at a loss) I know it is a midstream company, but what is your outlook hold on or invest in something else

Elliott Gue

4:28

ENLC isn't one of our top midstream picks right now. Last time we wrote it up, which was some time ago, we had it as a hold. Generally, though, we'd prefer exposure to other midstream names.

Jeff

4:30

Roger, what's your outlook for ORAN as it relates to dividend safety and potential growth?

Roger Conrad

4:30

I think the dividend is actually safe and well covered by free cash flows, and I consider Orange SA a buy up to 16 for its NYSE-listed ADRs. The company remains a likely merger candidate despite pulling out of negotiations with Vodafone earlier this year. But even without a formal union, I expect the company to pursue more consolidation of assets--with Spain being a good example as a market with too many competitors to encourage needed network investment. European telecoms like their US counterparts are very cheap right now as investors appear to have given up on 5G offering any real growth. I think 2022 will be the year when that starts to show up in earnings and I look for Orange and others to post solid gains next year after lagging in 2021.

Maverick

4:32

Good afternoon. I'm a recent subscriber that wants to thank you all for the quality of the issues and for taking the time to to do a Live Chat like this.

Roger Conrad

4:32

Thanks Maverick. We appreciate that. I've said before Elliott and I get a lot from the questions and comments in these chats. And this one--our last for 2021--is certainly no exception so far.

Maverick

4:35

Any thoughts on American Electric Power (AEP)? Curious as to why this is not a covered name. Thank you.

Roger Conrad

4:35

I do track American Electric Power in Conrad's Utility Investor in the Utility Report Card, which you can access from the website. I have covered it literally since I started advising in this sector, which dates back to the late 1980s. On a general note, I like the direction management has taken the company--toward regulated businesses with rate bases transitioning toward lower CO2 emissions and growing to lift earnings and dividends. I believe the current price is a bit more than we should pay but recommend the stock up to 85.

Lee

4:36

Gentlemen, thanks again for your wise counsel. I wish you would explain once again the tax consequences of selling and MLP that has been held over many years. I know the cost basis is reduced with each distribution….beyond that it gets pretty murky for me.

Elliott Gue

4:36

Thanks for the comment. Basically, as an MLP unitholder you are allocated a portion of the profits and losses generated by the MLP over the course of the year. Some of the money you receive is taxed as ordinary income, while some is a return of capital and is not immediately taxable. The return of capital portion reduces your cost basis in the MLP. Then, when you sell, you are subject to recapture -- the difference between your original cost and the adjusted cost basis is taxed at ordinary income tax rates, while the rest of your gains would be taxed at capital gains rates. MLPs include all the information you need to know in the tax packets they send out usually in the first quarter of the New Year.

Jeff

4:40

Elliott, how safe do you feel the dividend is in ET?

Elliott Gue

4:40

On their last call they were talking about potential dividend increases next year as they get their debt metrics down to the target range. I suspect they have plenty of cash to cover their payout in 2022 barring any "Black Swan" type events, the question is more about how fast they can bring down their debt and start to grow the distro again.

Mark

4:42

Hi Roger What effect , if any, do you think the Fed's suggested rate 3 increases in 2022 will have on value of the midstream players and in particular ET, KMI, and EDP. Will this create downside pressure oil ands demand and MLP volumes. Thanks Mark

Roger Conrad

4:42

Hi Mark. I don't think that even more than three Fed rate increases would have much if any real impact on our recommended midstreams' profitability in 2022. For one thing, all of them are now generating free cash flow after all CAPEX, debt service and dividends--so they haven't been and aren't likely to be accessing capital markets. Even refinancing isn't a great risk, since they've been active pushing out maturities as well as paying off debt with free cash flow.

I suppose it is possible that the Fed would raise interest rates to the extent that they crater the economy as the Volcker Fed did in the late 1970s/early 80s. But inflation isn't yet running anything close to a level that would require that degree of action. And the Fed in recent years has always pulled back before triggering anything catastrophic for the economy--which is really what it would take to depress midstream volumes meaningfully from what right now are still bottom of the cycle levels.

Roger Conrad

4:45

A really severe overall stock market selloff would be a risk to equities across the board, including the highest quality midstreams like Kinder and Enterprise--as well as very cheap but more challenged midstreams like Energy Transfer. But at this point, these companies are still trading at bear market valuations and have adapted their operating and financial policies to bottom of the cycle conditions.

Sandyw

4:46

Can we still get the 15% tax taken from Canadian returned. What's the form required?

Roger Conrad

4:46

It's a Form 1116--you file it with your US taxes and receive a credit for it. Same applies to all foreign investment withholding tax.

4:49

Do you have a rating & buy up to price on Stag Industrial RE IT?

Roger Conrad

4:49

Stag Industrial in in my REIT Sheet coverage universe. If you're not a member, I invite you to check it out by calling Sherry at 1-877-302-0749 anytime between 9 am and 5 pm ET, Monday through Friday. Industrial REITs in general have been a hot part of the market, so it's important not to pay too much. But I believe this is a high quality company with a safe dividend that should be increased at a low single-digit percentage rate early in 2022.

BKNC

5:04

Hi Roger. Thanks for all your help. AGLXY really took a dive last year. How do you feel about it going forward? I have been reluctant to add to the position, but it obviously could go a lot higher if it starts to move again. It's hard to have a read on it being an Australian stock. No idea if the government will stop destroying their electric provider.

Roger Conrad

5:04

Even AGL Energy appears to have caught a late December bid, though not nearly enough to erase what now looks like about a 45% loss for the year. I rated it hold for much of 2021 precisely because I though we collectively held enough of it at CUI, and that remains my view. I do continue to believe that when this company formally separates the two pieces will be worth considerably more than the current share price. And that transaction still appears on track to close by the end of AGL's fiscal year (June 30, 2022). The retail unit will at that time be the leader in the sector in Australia, as well as a leading provider of distributed energy and renewable energy. The generating unit, which appears to have a negative value in AGL's share price, will still be the country's leading power producer with assets that are absolutely essential to Australia's economy--so obviously won't be worthless. That said, my current intention is to keep the stock a hold until we get closer to the split and we see more details.

Roger Conrad

5:04

AGL has a lot of potential but also carries a great deal of risk--and there's no point in sinking more into it when there are other attractive stocks.

BKNC

5:10

Curious about REITs. I think many companies will consider not upping their leases for business property. Conversely, I can see the data centers and medical properties doing well. Do you believe there are certain segments of the REITs which look good for 2022 and others to avoid?

Roger Conrad

5:10

Yes, absolutely. As I answered in a question about office REIT Brandywine earlier in the chat, I am advising caution for most office REITs--with the exception of those that occupy obviously growing niches like leasing to Lifesciences business or that operate in regions/cities likely to see a big comeback in 2022.

Data centers remain in high demand. And in fact, one of my REIT Sheet recommendations CyrusOne (NSDQ: CONE) has handed us a windfall profit by attracting a takeover offer from a consortium led by private capital firm KKR. I've now rated it a sell, as it trades right at the takeover price. My main reservation about most data center REITs is very high prices. But I have identified some worth buying in the current REIT Sheet.

Bottom line: I see big potential returns in selected individual REITs in 2022--but risk in others that makes wise selection very important. Another sector I'm cautious on: Seniors housing, which I believe has suffered significant reputational damage from the pandemic

Roger Conrad

5:10

and is due for consolidation.

5:12

If you're interested in my view on REITs--including in depth advice on an expanding universe of 80 plus in my databank, then please do call a Sherry at 1-877-302-0749 9-5 ET, M-F--and we'll be happy to give you a look at what we do.

Fred

5:18

UI appreciate your insights. What is your opinion of Delek Partners and are their better investments in Eastern Mediterranean Natural Gas Discovery and Exploration?

Roger Conrad

5:18

Hi Fred. We're not aware of Delek Partners or its parent Delek US Holdings having any investment in the eastern Mediterranean, or exploration and production anywhere. The parent is basically a refiner with operations in Texas, Arkansas and Louisiana, while Partners basically owns pipeline assets the parent uses.

If you are interested in the eastern Mediterranean specifically, you can get pretty good exposure with super oil Chevron Corp (NYSE: CVX), which last year acquired major player Noble Energy at a heavily discounted price. Its assets there are already helping deliver rising output at a low price and there's plenty of room for further expansion, as Israel and its neighbors look to boost output of gas to serve supply hungry Europe. Chevron has had a good year in 2021 but is still a buy up to 125.

Fred

5:23

Do you have an opinion on Desert Mountain Energy?

Roger Conrad

5:23

It's not one we've covered to date. We do believe there will be a time in this energy cycle when developmental companies like Desert Mountain will be in significant demand--and all aspects of helium/hydrogen are potentially interesting. On the other hand, this company has never had real earnings and has bled cash for its entire history. It's a quintessential penny stock--if you buy in, be prepared to lose 100%.

Sohel

5:30

Hi Roger, Thanks for hosting these chats .. incredibly useful! I notice you added BSM to the high yield list. Could you explain the rationale and also does it come with a K-1? Additionally could you comment on BGR BlackRock Energy and Resources as investment for a retired investor

Roger Conrad

5:30

Black Stone is an LP, so you should receive a K-1 as you would with any MLP. My rationale for recommending it is basically that the companies drilling on its lands (royalties are 87% of total Q3 output) are likely to increase output going forward, that realized selling prices are going markedly higher from the $38.61 per barrel in Q3 as lower cost hedges are replaced by higher cost ones, that the company's own production and realized selling prices will increase in tandem, and that management will share the wealth with investors has higher dividends. Distributable cash flow of 34 cents per unit covered the 25 cents per unit dividend by a 1.36-to-1 margin even at that low level of realized selling prices in Q3. A doubling of realized selling prices would arguably produce DCF north of 70 cents per unit and commensurate dividend growth. Basically, Black Stone is an already high yielding leveraged way to bet on oil prices at least staying in the neighborhood of current levels in 2022. I rate it a buy up to 12.

Roger Conrad

5:34

As for Blackrock Energy & Resources Trust (NYSE: BGR). it looks interesting as a closed end fund trading at a sizable discount to net asset value. But it's important to note the monthly distribution was more than twice the current level as recently as February 2020. CEFs that cut usually have a tough time getting back to premiums from discounts. I would also argue that this fund holds basically high quality big energy producers, with Chevron number one at 12.5% as of the end of Q3. My view is you could own the best of these in your own account, not pay the expense ratio and not have to own the whold portfolio.

Sohel

5:40

Pipeline stocks have recommended for a while but they continue to languish or in fact fall. Aggressive positions like PAGP and ET and even "Safer" ones like EPD. They don't seem to rise with oil but do fall with it. What will drive the recovery? What is your outlook on these and other MLPs in 2022?

Roger Conrad

5:40

First, thank you for those kind words attached to your previous question Sohel. We appreciate your participation as well. My opinion on why midstream companies have generally lagged this energy cycle upturn so far really hasn't changed over the past few months. That's mainly that companies like Enterprise, Plains, Energy Transfer and others are not guiding to a volumes recovery anytime soon. Disappointment in guidance is in my view clearly what's behind the selloff we saw in November and early December for midstream stocks. And the selloff accelerated when oil and gas prices retreated, as investors I think rightly perceived that would only make producers more conservative with their CAPEX going forward--which in turn would continue to hold back volumes.

The saving grace for the best midstreams is they have clearly adapted financial policies including dividends to a continued environment of tepid volumes. But really until producers take up their output and volumes recover to where they've been at this stage

Roger Conrad

5:40

in previous cycles, I think midstream stocks will continue to lag--and we'll have to continue to be patient on them.

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