JotCast | 2/24/22 Capitalist Times Live Chat

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2/24/22 Capitalist Times Live Chat

Roger Conrad

1:48

Hello again everyone, and thank you for joining us with the February Capitalist Times webchat. Given everything that’s happening in the markets now, Elliott and I are looking forward to a lively discussion today.

As always, there is no audio. Just type in your questions and we’ll get to them as soon as we can comprehensively and concisely. The chat will continue so long as there are questions left in the queue. And we will be sending you a link to the complete transcript of all the Q&A, probably tomorrow morning.

Per usual, I’m going to start by posting answers to questions we received prior to the chat.

Q. Hi Roger. What's with Telephone and Data Systems (NYSE: TDS)? You’ve been advising to buy under $24 but it keeps sinking, now under $16. Sell? Hold?--Mr G

A First, I don't think anything is happening that’s specific to with the company to drive down the price at this point. The Q4 results and full year 2021 they reported last week were solid once again, with operating cash flow supporting CAPEX plans, the balance sheet and the dividend. And in fact, the company did announce a dividend increase that was very much in line with expectations.

1:49

Management's guidance update was also pretty much as expected. The company will continue to grow revenue at a low single digit rate as it adds more fiber broadband and 5G wireless users. The cost of accelerating the rollout of fiber broadband and 5G wireless infrastructure is expected to depress 2022 EBITDA but will raise it in subsequent years, as the company attracts and keeps more customers.

Rather, I think you have to view TDS' recent share performance in light of what's happening to the overall stock market, as well as the selling momentum in the telecom industry that's carried over from 2021. The sector theme is that the Big 3--AT&T, T-Mobile US and Verizon--are now taking broadband customers away from other companies, with cable television the primary loser but other smaller companies also taking hits.

In my view, that’s a trend many analysts have been missing for a while. But TDS has a unique market position in that it's heavily rural and small town, which allows it to have a regional strategy

to hold onto and expand business.

It's done a good job historically of that. But it was obvious to me from the earnings call that management now faces a great deal of skepticism it can keep it up. And that’s now combined with the ongoing de-risking in the overall stock market to intensify selling pressure on TDS shares.

I will also point out that this is not the first time this stock has had a wide price swing. In the past 12 months alone, there have been several big ones taking place in just a few days.

The key for me is I'm still convinced their business is solid and strategic plans are intact. And so long as that's the case, I'm willing to bet on a rebound. This company is also still a prime takeover candidate with a market cap of less than $2 bil and enterprise value just 5.4 times EBITDA. I do think it's going to take some patience and tolerance for volatility to stay with TDS. But at this point I still believe that’s worth it.

Q. Hi Roger. Thanks for pounding the table on Verizon

1:50

Communications (NYSE: VZ) last year. I picked some up in the 40s, so your advice has worked well. Right now, VZ has a number of attractive qualities, including a low beta, a 5 percent yield, and a high entry barrier that keeps potential competitors out of its space. Despite the latter advantage, analysts are only projecting 2 percent earnings growth for this year and next. Do you expect VZ to outperform those modest expectations, and if so, what would drive growth?—R.W.

A. Verizon became the dominant US communications company it is today by sparing no expense to build America’s fastest and most reliable 4G wireless network in the previous decade. Management is now making much the same bet on 5G communications. And if there’s going to be a significant earnings beat this year it will be from that effort, particularly from the uptake of services to enterprise customers.

The company itself has set 2022 earnings guidance in a range of $5.40 to $5.55 per share. That excludes charges for amortizing acquisition

related items, which are expected at 17 to 19 cents per share this year versus 11 cents in 2021. That implies earnings growth of 0.2 percent to 3.2 percent.

Verizon’s 2021 earnings guidance was very similar to its current projections for 2022. And it proved to be conservative, as Q4 adjusted per share results were up 8.3 percent and full-year profits were higher by 10 percent. I believe there’s a very good chance the same thing will happen this year, with cost controls and sales growth both beating expectations.

But there are two other factors to remember. First, this is a year Verizon apparently intends to pursue business as it rolls out net infrastructure and services rapidly. That means costs will be higher than usual, and in fact management expects a 15 cents per share hit to the bottom line from the cost of getting its recently acquired C-Band spectrum up and running. The shares issued to acquire TracFone from America Movil (Mexico: AMXL, NYSE: AMX) will cost another 7 cents per share.

1:51

Those are obviously investments Verizon believes are worth making to ramp up future growth. But it’s also true that without them, the company would be expecting 6 percent earnings growth at the mid-point of its guidance range rather than 2 percent.

Second, Verizon now trades at just 9.5 times expected next 12 months earnings. That’s a valuation level typically occupied by companies with extremely cyclical earnings or that are rapidly shrinking. Verizon is neither by a long shot. In fact, the only time such high quality companies do sell at such low prices historically has been at the bottom of bear markets.

Bottom line: Verizon did well last year by beating what were extremely low investor and analyst expectations. And it’s set up to do it again this year, even as it builds what should be an even more dominant long-term market position in US communications than it currently occupies.

Q. With fresh money to invest, I’m considering two real estate investment trusts:

: Gaming and Leisure Properties (NSDQ: GLPI) and KKR Real Estate Finance Trust (NYSE: KREF). As a REIT Sheet subscriber, I know both are on your recommended REIT list. Do you favor one over another or perhaps a different specialized REIT from the list ? In advance, thank you. I have truly prospered from your advice.—John R.

A. Hi John. Yes as you note I like them both. I think GLPI probably has more potential upside this year in terms of share price, while KKR has the higher yield at upwards of 8 percent. The gaming and leisure sector appears to be picking up some steam with the rollback of certain coronavirus restrictions—and I think that will improve investor perception of the safety of GLPI’s dividend long-term. Note that management also paid a special cash dividend of 24 cents to shareholders of record December 27, so there’s definitely a desire to return capital.

As for KKR, it’s holding its value very well in this stock market selloff so far. As I noted in this month’s REIT Sheet update, Q4 earnings

1:52

were very solid and management appears to be in portfolio expansion mode, which is ultimately the path to dividend growth. It’s probably the more conservative pick of the two at this point.

By way of other specialized REITs, the Q4 numbers and guidance my January recommendation Hannon Armstrong Sustainable (NYSE: HASI) put up were much better than I thought they’d be. That includes projected portfolio growth as well the doubling of the projected dividend growth rate, which is now a range of 5 to 8 percent a year with 7 percent this year.

So far Hannon shares are holding onto most of their post-earnings announcement bounce. But this stock is still quite cheap in my view, especially considering the company basically owns the niche of financing small to mid-size commercial energy efficiency projects—and at a time when fuel and heating bills are going through the roof.

Q. Cheers from New Mexico. Do you have any thoughts on Comcast Corp (NSDQ: CMCSA)? The stock is down. Time to buy?—Ben F.

A. My main thought on Comcast is a short time ago it was expensive and it’s not any longer. The main reason is the prevailing narrative in the communications sector that cable companies’ rapid broadband growth is slowing.

The best retort to that is there’s little if any evidence of weakness in Comcast’s Q4 results, which I highlighted extensively in the Utility Report Card comments in the February issue of Conrad’s Utility Investor. And it looks like Q1 will also be strong, including at the media division given the record Super Bowl viewership.

In any case, nothing has changed about this company and the stock is now about the cheapest it’s ever been in terms of valuations, at 12.8 times expected next 12 months earnings. And I think it’s a good time for anyone underweighted to add to positions.

Q. Hello Roger. I have two questions for you based upon my perusal of your Feb. issue of the REIT Sheet (and also for the Webcast if you so determine

1:53

First, you encourage us readers to “Stick to best in class.” I have only been a subscriber to REIT Sheet for less than a month now. So I do not necessarily know which of your recommendations are “best in class”.

For example, with CUI I have been a subscriber for 8 years. And I know very well how strongly you feel about Enterprise Products Partners (NYSE: EPD), MPLX LP (NYSE: MPLX) and Magellan Midstream Partners (NYSE: MMP) as “best in class”. And thanks to you I have substantial positions in all three, especially after their stock prices fell in March 2020.

Which ones are “best in class” on your REIT Sheet recommendations? Do Alexandria REIT (NYSE: ARE), Medical Properties Trust (NYSE: MPW) and Gaming and Leisure Properties (NSDQ: GLPI) qualify as “best in class,” and with their having dropped in price as you have pointed out to us, are they an appropriate purchase for “new money”?

Second, in either your last issue of CUI + or EIA, you reminded us of the need to invest in companies with strong dividend growth which exceeds our inflation rate. I do not know if you have instructed us as to the same philosophy here in REIT Sheet. Probably. Having said that, then is WP Carey’s (NYSE: WPC) “more low single digit dividend growth this year” as referenced on page 8 of the REIT Sheet sufficient in your estimation?

Thanks for addressing these elementary questions Roger. I am new to REIT’s and your publication and do not have the experience in REIT’s as I do with your CUI and EIA’s recommendations over the last 8 years. Give me a few years please!!! Best--Barry J.

A. Thanks for those questions Barry, as well as being a member of so many of our advisories. Starting with question one, those three REITs are definitely priced at a good level for fresh money, with the caveat they could get a bit cheaper near term if the current turmoil in the broad stock market gets worse.

1:54

As for the question of best in class, I think all three are at what they do. For ARE that’s owning life sciences buildings. For Medical Properties, it’s owning leases on single purpose healthcare facilities like hospitals. And for GLPI, it’s owning leases on gaming facilities, for which its primary competition is VICI Properties (NYSE: VICI).

You might have noticed I also provide risk ratings on the REITs, basically broad categories of “conservative,” “aggressive” and “speculative.” Of these, ARE is rated conservative and the other two as aggressive. That’s based on a range of factors including dividend policy sustainability, balance sheet, revenue reliability, operating efficiency and regulatory concerns. And overall, ARE and other conservative-rated REITs should be considered a bit safer than aggressive. But all three of these are certainly suitable for purchase.

Regarding inflation, the current rate is 7.5 percent. But I think companies/REITs that grow dividends 5 to 7 percent a year should do a very

good job keeping up with the inflation rate I expect to see going forward—which I think will be somewhat higher than the average rate of the past few decades.

You have a good point about WP Carey. I guess I’m willing to live with the lower growth rate for three reasons. One, they are still growing the payout on a regular basis, which indicates management views that as important. Two, the current business plan of focusing on targeted properties including industrial sites as well as owning rather than just managing should enable the REIT to speed up dividend growth in coming years. And three, the REIT already has a pretty high yield of almost 6 percent—which should protect the share price on the downside in the near term and gives us a nice head start with income longer term.

By and large, however, I will favor the higher dividend growth rate when it comes to a choice between REITs.

1:56

Well, that's all we have in the prechat queue. Now let's get to the live queue. Once again, there is no audio on this chat. Please type in your questions and Elliott and I will get to them as soon as we can comprehensively and concisely. If you have to leave the chat before your question is answered, rest assured it will be before we sign off today. And everyone will be sent a link to the transcript of the complete Q&A.

Teresa P

2:05

Congratulations for your call on South Jersey Industries as a take-over candidate. Glad I paid attention!

Is there anything long-term investors need to know about why Telephone & Data Systems has been dropping? Thank you.

Roger Conrad

2:05

Hi Teresa. Given the current volatility in the market it is nice to get news like that. The takeover price for SJI of $36 a share is a very nice premium. And given the buyer is private capital, I suspect this won't be the last deal we see in the natural gas distribution utility space. Even the biggest companies like Atmos Energy ($14 billion market cap) are really not that large.

I addressed the drop in TDS shares in one of the pre-chat questions. But the bottom line is Q4 results were solid and support the dividend, balance sheet and asset expansion plans in fiber broadband and 5G wireless. Guidance does the same, despite higher network investment this year. Credit ratings were affirmed by Fitch and the company raised its dividend again. Bottom line: This drop appears to be due to market and sector perception-related factors. And that in my view means a recovery if we're patient--possibly with a takeover.

Quint

2:14

Good morning gentlemen
Would you take some SJI off the table on today’s news?
Thank you

Roger Conrad

2:14

Hi Quint. SJI at a little under $33 a share is still trading almost 10% below the $36 a share offer price. That plus the 31 cents per share quarterly dividend still represents a pretty sizable return for holding on to the close. I can think of a couple reasons for the current discount--one is the crazy day we're seeing the stock market that could well be preventing normal arbitrage action. We'll see how that sorts out the next few days. This deal will need the approval of New Jersey regulators and there could be some questions about the acquirer Infrastructure Investments Fund--as well as its ability to finance an all-cash offer of $4 bil or so while holding ratepayers harmless. And there are the usual "shareholder rights" firms are looking for an angle to sue based on the dubious proposition the buyer is underpaying. But at this point, I would consider either only a minor risk to this deal closing later this year. And IIF has both the scale and experience to pull this off. I'd keep my SJI a bit longer.

2:23

Roger,
A while back you recommended INTL in Capital times. What is your opinion on the stock right now.
Also, in the view, how latest action in Eastern Europe will affect TTE.
Thank you

Roger Conrad

2:23

Super oil TotalEnergies has done business in Russia for many years. And according to the CEO, the company earns a little less than 5% of its cash flow in that country ($1.5 bil of $30 bil plus). That's apparently enough exposure to raise selling pressure on TTE today, though it should be said that energy stocks overall are weak today despite the spike in the price of the commodity.

At this point, the company not committing to leaving Russia and says operations there are "unaffected" by what's happening in Ukraine. But assuming the worst case that it has to shut down to avoid being hit with sanctions itself, it would almost certainly make up the hit to earnings many times over with much higher selling prices for its remaining output (if Russian oil is embargoed), as well as big ongoing investment in renewable energy. Bottom line: Selling today looks like a buying opportunity for anyone not in the stock.

As for INTL, do you have another name or listing?

Eric

2:24

Congrats on the UNG trades the last several months. Has the Ukraine situation changed your thinking of US natural gas prices over the next few months? You successfully entered a short trade and took profits on half the position a few weeks ago. Are you thinking about re-entering the half that you took profits on? If so, at what price of UNG looks interesting from a risk-reward perspective? Thanks for holding these chats!

Elliott Gue

2:24

Thank you for the questions and kind comments. Russia's invasion of Ukraine doesn't change my view of US natural gas prices significantly. Netherlands TTF benchmark prices -- a key EU benchmark -- was up as much as 63.77% intraday overnight on the news and German March electricity futures spiked 43%. This is an enormous issue for Europe because the Continent gets around 40% of its gas from Russia, a number which is much, much higher for some nations including Germany. I've seen some reports that Gazprom (the Russian producer) just isn't exporting gas to Europe right now and their storage situation was already tight. However, UNG tracks US not European gas prices. The only real link between US and European gas prices is via US exports of liquefied natural gas which are limited by existing liquefaction terminal capacity. Since these liquefaction facilities are already operating at maximum capacity, it doesn't really matter how high EU gas prices go, or how attractive US LNG exports become because we can't

Elliott Gue

2:24

export more than we're already exporting. So, in the US, I'd describe US natural gas storage as "moderately tight" after some cold snaps in recent weeks. However, storage in the lower half of the five-year range doesn't justify prices in the $4.50 to $5 region we've seen recently. Indeed, at that level, I'd expect to see some gas-to-coal switching and increased production from certain fields (the Haynesville in particular). Also, US storage drawdowns start to diminish by the middle of March or so and we're running out of winter. So, I think gas returns to the $3.50 to $4 range this spring. We are looking at the potential to re-short some more UNG -- what stopped us this morning is that when the market makes extreme moves like it did this AM, it's generally advisable to let the dust settle a bit before making any major moves.

Dwayne E

2:30

Why are the telecons (TDS/T/VZ) down so much today?

Also, why is AGR down so much versus its peers?

Roger Conrad

2:30

Hi Dwayne. I addressed a couple questions about telecoms earlier in the chat. But regarding selling today, the bottom line is nothing has happened from a business standpoint--really at any of the major telecoms--that could be identified as responsible for selling pressure. Rather, what we're seeing is likely related to a general shift out of stocks in response to geopolitical events and to investor perception that company margins are going to compress this year in the face of competition--despite the positive revenue impact from the uptake of 5G. My view is these stocks now trade at basically bear market valuations that are pricing in a lot of bad news yet to happen (or likely to happen) and none of the momentum that was reflected in Q4 results and 2022 guidance. I continue to believe the sector's best in class are compelling, deep value buys--but it looks like we're going to have to wait a while longer for the payoff.

As for Avangrid, shares have been dipping since New Mexico regulators unexpectedly

Jack A

2:40

Hi
Premarket today, the price of exploration and production companies were sharply higher, but when the market opened, the prices were down.............. How do you explain that??........... Also, with the price of WTI reaching these heights, what particular sub sector in oil should give us the best bounce............... I'm thinking the refiners may suffer because they will have to pay higher for the oil they use.............. I was hoping we would see increased drilling, and the increased volume would help the pipelines, but that doesn't seem to be happening............. Where should we focus placing our money in this environment??
Thanks

Elliott Gue

2:40

In my opinion, there are two reasons you're seeing E&Ps trade lower (and oil and gas trade well off their highs earlier today) for three reasons. First, it's a classic "Buy the rumor, sell the fact" reaction. Essentially, energy stocks and oil itself rallied in anticipation of a Russian invasion and what you're now seeing is investors/traders booking gains on the news itself. Second, energy stocks and oil prices rallied through 2021 and most of this year due to factors other than Russia-Ukraine. Commodity prices then "popped" aggressively in anticipation of an invasion, and simply rallied ahead of themselves, pricing in a much greater impact on global supply than is likely. Third, while there's a lot of talk about the importance of "geopolitics" on oil prices, in my experience, headlines like this

Elliott Gue

2:40

usually have only a very short-lived impact on prices. Geopolitical analysis actually has a terrible record in informing oil trade and price forecasts in my experience. Bottom line: once the dust settles over the next few days, I'd expect the trends that were in place before this news to reassert. So, a pullback in oil/energy is possible near-term but I'd expect any such move to be a buying opportunity. Historically, producers have the strongest leverage to rising oil prices. In addition, we remain bullish on the refiners -- particularly Valero -- due to rising US energy demand and the fact that less refining capacity is driving higher margins. VLO and other US refiners also benefit from the widening discount of US WTI compared to European Brent prices.

Roger Conrad

2:41

Continuing on Avangrid: since regulators rejected the PNM Resources merger. I'm still sifting through the Q4 report from last week. But my number one fear of a big increase in anticipated offshore wind project costs did not materialize--with construction of the Vineyard facility continuing in management's words "hitting our key project milestones." The company also announced a new venture to manufacture subsea cables in Massachusetts to connect its facilities with the land grid. Earnings were up 8% for full year 2021, and 2022 guidance of $2.20 to $2.38 builds in more growth--though I don't believe we'll see a dividend increase unless/until the PNM merger finally closes next year, when New Mexico regulation gets an overhaul. I think the selling pressure in AGR is part market related and part analyst skepticism on cost for the wind power program. But it's also not expensive as it has been so often in the past. I think it's still a worthy holding.

Bonnie Beth

2:41

Hi Roger! Thank you for this chat, and for all the excellent investing education and advisement over the years.

Roger Conrad

2:41

Thanks Bonnie, much appreciated.

Eric

2:46

Great trade with OXY the last few months. OXY and XLE have diverged from oil prices the last few days. Is it a buy opportunity for OXY and XLE or is there more "sell the news" for OXY and XLE in the near future? Thanks for your guidance through these volatile times!

Elliott Gue

2:46

It's a tough trading call short term. I believe we could see a bit more selling in energy stocks near-term -- OXY and other energy producers are still extended technically even though they've pulled back near-term. This divergence between oil and OXY/XLE action is also normal -- energy stocks are more leveraged to long-term average commodity prices and don't benefit much from short-term supply/demand driven "spikes." Our plan remains to trade around this position -- adding on dips in OXY into support and selling on big rallies. We still see OXY ultimately rallying to around $50 this year.

Arthur H

2:48

Good afternoon Gentlemen,

Thank you for all your hard work and spot-on responses to our questions.

Please discuss AQN, AQNU, and AY and whether you have a preference for the buy-and-hold investor.

I did well with CNP.PRB and I'm now happy to hold some CNP. It seems that AQNU is a similar offering to CNP.PRB or am I mistaken?

Thank you

Roger Conrad

2:48

Hi Arthur. Algonquin Power & Utilities and its Atlantica Yield affiliate won't report their Q4 results and update guidance until early March. Based on what we learned on Investor Day in December, I'm not expecting any surprises. The big issue for Algonquin--and by extension the convertible preferred--is closing the Kentucky Power acquisition from AEP. But from all indications, that's proceeding well and in contrast to last year, the company's wind power facilities appear to have performed very well during the Texas winter. Of those three, I would say AQN is best for a long-term growth and income investment. AY is going to give you a solid yield with growth and the possibility of a full on takeover. And the convertible will give you a higher yield and some upside at the cost of fully participating in what should be a strong performance for AQN the next few years.

The main difference between AQNU and the bet we made with the CNP.PRB is Centerpoint was a more aggressive bet than Algonquin is now.

Roger Conrad

2:50

Continuing with Centerpoint, it needed to sell its Enable Midstream unit--and our bet on the preferred was essentially a bet it would succeed. I don't see any immediate catalyst of that magnitude for the Algonquin convertible, though it does have a lot of time to benefit from appreciation in AQN common shares before the mandatory conversion.

Dennis H

2:59

Roger, Elliot.

1. Any news on when the Suez (SZSAY) squeezeout will finalize?

2. Is now a good time to buy? What are your favorites in this correction?

3. Is this a good time to sell the oils and miners?

Thanks

Roger Conrad

2:59

Hi Dennis. It should be taking place as we speak and hopefully it already has for most people who owned it. I'm seeing a price of $11.11 per ADR on Bloomberg Intelligence today, with a high of $11.18. The EUR9.85 per share cash value right now equates to $11.03 at the current $1.12 value of the Euro, so that seems about right. The shares are being bought, presumably by agents of Veolia. But it might make sense to get on the phone with your brokerage now to be sure you're getting cashed out.

I think the best way to play the correction we've seen so far is make incremental investments in any stocks you want to own more of--so long as they are indeed trading for less than our highest recommended entry points. It's still not clear if this is really going to be a break in the market. But our entry points are chosen with the long-term in mind based on business quality, yield and sustainable growth--with a target annual return of at least 10%. Our stocks may get cheaper in the near term if this correction really

Roger Conrad

3:00

Continuing with Dennis' question--they'll get cheaper if the correction picks up steam. But 10% will keep your income ahead of inflation. And buying good stocks at prices targeted to produce that kind of return is a great way to build wealth as well.

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