JotCast | 3/28/23 Capitalist Times Live Chat

Return to

3/28/23 Capitalist Times Live Chat

Prev Page View Full Chat Next Page

Roger Conrad

3:31

Hi Phil. ONEOK actually raised its quarterly dividend by 2 cents a share with the February payment--the first boost in three years. Q4 results and 2023 guidance released in early February were pretty solid and actually better than I thought we'd see. And last week Fitch affirmed the credit rating. This tends to be a more leveraged name to the cycle, since it depends largely on volumes in the Mid-Continent and Bakken that are not as reliable as the Permian Basin, for example. I think OKE could get into the low 50s if the stock market turns lower as we expect. But it's a solid company and I think would be a buy there, though probably a hold for now given the market headwinds.

As for Medical Properties Trust, I do think management will do everything it can to avoid a dividend cut. But the 2023 FFO guidance mid-point of $1.575 per share ($1.82 in 2022) and recent S&P credit rating downgrade don't leave much room for error. And with tenants increasingly stretched and interest costs rising ($2.8 bil floating rat

Roger Conrad

3:34

continuing Phil's question, $2.8 bil floating rate debt and $487 mil debt maturities this year versus a market cap of just $4.5 bil doesn't leave much room for error. I still think a cut is coming with a dip to a mid-single digits price. And as much as I think management is doing a good job in a tough environment, I think this is one we should continue to avoid for now. I will have more later this week on MPW in the second half of this month's REIT Sheet--which includes the table of 85 REITs.

Dennis H.

3:40

Roger,

Unitil (utl) is over your buy target. Do you have any advice or sell target?

Thanks

Roger Conrad

3:40

Small electric and gas distribution utility Unitil Corp has had a nice bounce recently--very likely from institutional money seeking a safe haven. My advice for those who own this stock would be just to hold at this price. As far as a potential place to sell. I think the neighborhood of 65 has generally been a good spot to take money off the table. And the yield at that level would be less than 2.5% even after last month's increase. But this is a very solid company with a strong New England service territory--and that in my view makes it a perpetual takeover target with a market cap of just $900 mil. So feel free to write me if we do see a move to that level, as we would probably want to consider takeover implications. Of course, I will continue to update the company in the CUI Utility Report Card every month.

Eric F.

3:48

I’ve held MPW and have a loss, does it make sense to keep holding at this point?

Roger Conrad

3:48

Hi Eric. As I indicated answering Phil's question, I would recommend avoiding Medical Properties for now. We did take a sizable loss late last year selling it from CUI Plus/CT Income. I didn't know it was going to go down by half from there. But I did believe that the headwinds against the REIT were just too strong for shares to recover this year, even for so skilled a management team. And unfortunately, those same headwinds of rising interest rates, US regulation that's become reflexively hostile to hospital mergers regardless of economics and mounting economic pressure on tenants--for which MPW rents are an increasingly significant line item expense--have if anything become much worse. As I indicated to Phil, the odds of a dividend cut have grown as well, with S&P cutting the rating to BB last week. They may try to hold the dividend again in May. But it's hard to see Q1 results not under extreme pressure. And I think shares would probably go to $5 or less on a dividend cut.

Kathleen

3:57

Are you worried about short-term Market weakness due to the debt ceiling, banking issues and geopolitical environment currently. What is your view of energy if we get some turmoil versus gold and traditional safe havens. Thank you!

Elliott Gue

3:57

Thanks for the question. Yes, we do have serious concerns about the broader market and ongoing instability in the financial system/credit markets. For more than a year now, I've been calling for the US economy to enter recession and for the S&P 500 to decline to the 3,000 to 3,100 range. Both those targets remain valid; I think the recession will start by Q3 of this year and I fear we may have already seen the 2023 peak for stocks. Generally speaking, energy is a cyclical, economy-sensitive group that will decline alongside the broader market when there's a recession. That's the main reason we recommending raising considerable cash in the Energy & Income Advisor model portfolio last November. Our goal has been and remains to put that cash back to work in the group on pullbacks; many of these stocks are already well off their late 2022 peaks and we're definitely pivoting towards looking for opportunities.

Elliott Gue

3:57

In addition, as I mentioned in the flash alert we send out last night "Oil Bears Everywhere," the stock market isn't even close to pricing in a recession at this time -- it's still very expensive and the S&P 500 is heavily concentrated in 5 to 7 large-cap stocks that are even more expensive than average. However, I believe that crude oil prices -- down 40 to 50% from their peak last year -- are already reflecting significant recession risk/cyclical demand destruction. Speculators are less long oil than they've been at any time since early 2016; as prices find a low and rally, that could likely offer some additional upside fuel. Energy stocks are also cheap relative to the broader market and our expectations for free cash flow over the next few years at calendar futures oil/natgas pricing. So, while we do have concerns about the cycle, we believe that energy will remain relatively resilient and that many of our favorites are close to attractive buying opportunities.

Andy Z.

3:58

One last question from me - I read there is concern about Commercial Real Estate (CRE) values that could create another ticking time bomb. The theory is, there are a lot of commercial property loans that are coming up for refinancing. 70% of those loans are held by small/regional banks. The fear is refinancing at the higher rates of today will make the properties unprofitable, and the landlords will default/hand the keys to the property back to the banks. The banks will need to dispose of the property at fire sale prices, which will lower the value of other properties, forcing more defaults/walking away from properties. The article mentioned that Blackstone and Brookfield (2 of the largest property owners/investors) have already defaulted on over a billion worth of properties combined because the values were below what they owed. How will this affect the NAV of Office REITs like ARE and BXP? Or mREITs like KREF who specialize in office/commercial? Also, do you see this spilling over to residential housing val

Roger Conrad

3:58

I think the danger from commercial property loans is a far bigger risk to the banks than to REITs. I don't think the risk is universal to the sector--for example, Arrow Financial is regionally focused in upstate New York and has focused government security holdings on the shorter end of the spectrum. But I think so long as the Fed squeezes, we're likely to see more banks fail--with the central bank essentially playing whack a mole to combat any systemic risk.

Of those 3 REITs, KKR Real Estate (NYSE: KREF) is by far the most exposed to commercial property loans--though like Brookfield and Blackstone, KKR is certainly deep pocketed and ring fenced from trouble to weather defaults. Earlier this month, the company also noted that 60% of its portfolio is multi-family and industrial--so not really exposed to office. Its problem is the variable rate debt it owns is increasingly difficult for its borrowers to finance--so delinquency risk is offsetting its ability to profit from inflation. But I intend to hold

Elliott Gue

3:59

...I wrote about gold in response to a prior question, but the bottom line is that I remain bullish gold longer term. Gold and gold mining stocks often do see some volatility and corrections when the broader market sees a powerful sell-off. They're not perfect hedges or safe havens when the market is weak, but should generally hold up well through this phase of the economic and market cycle.

James

4:02

Hi Elliott, for the EIA Actively Managed Portfolio, we have dry powder that will be used to make purchases. When these purchases are made, have you considered having us set limit orders to buy the shares when they reach some area that you consider an extreme bargain? Not exactly like Creating Wealth, however, where purchases are made in 20-30% positions, because my 401K self-directed brokerage charge high commissions for trades. But rather a limit order for a full or half position when it reaches a particular price.

Elliott Gue

4:02

Yes, absolutely we'll consider that. In fact, we have deployed a similar strategy in the past with specific "Dream Buy" prices, so I'd be surprised if we didn't approach the next buying opportunity in the group using a simialr entry strategy. We're big believers in scaling into and out of positions rather than going "all-in" and all out in one transaction as this generally results in better entry/exit prices for recommendations.

Roger Conrad

4:05

Continuing with Andy's question on CRE, I intend to hold KREF at least until earnings in late April--as shares are pricing in a dividend cut already and KKR at least for now appears well placed to not only survive this financial system turmoil but to actually pick up business from it. As for Alexandria REIT and Boston Properties (which I addressed at length in an earlier question), the key is occupancy and lease renewals. And these still appear to be very strong. Neither has significant bank exposure. Alexandria has no maturing debt until 2025 and only $350 mil floating rate debt of $11.5 bil total. Boston is somewhat more leveraged with $500 mil coming due in 2023--but still a decently lost cost of capital. As I've said in the REIT Sheet, I would generally continue to avoid office REITs as we have for some time. But see Alexandria and Boston as survivors and on track for a big recovery, with limited additional downside from here.

Buddy

4:09

Elliott, Cramer was plugging CHX last evening. Do you follow it and, if so, do you like it? The fundamentals are impressive.

Elliott Gue

4:09

Yes, I do follow ChampionX (CHX); in fact, they recently hosted an investor day back in early March which prompted me to take a closer look. I think what's interesting about them is that they are heavily levered to production related businesses rather than drilling/completion businesses, which means they have a more stable earnings/revenue profile. I also suspect that in a world where producers are focused more on free cash flow than growth in barrels coming out of the ground, you'll see a shift in capital budgets in favor of production over drilling. They also have exposure to one of the energy themes I've liked for years -- the end of "Easy" Oil -- basically that with a lot of simple and cheap-to-produce fields already tapped, producers are turning more complex petroleum systems such as deepwater/unconventional. So, yes, we like CHX. Certainly, there are broader market spillover risks as with any smaller-mid-sized energy company but the story is sound.

Fred

4:12

Thank you, I have appreciated our comments for many years. Do you distinguish between BEP and BEPC as investment vehicles?

Roger Conrad

4:12

Hi Fred. They both represent the same ownership in Brookfield Renewable, which continues to be one of the most reliable dividend growth bets on renewable energy growth--and with the acquisition of Westinghouse's nuclear plant services unit a major player in that area as well. BEP are partnership units and so pay a tax advantaged dividend, requiring a K-1 filing at tax time. BEPC are C-Corp units and so pay a qualified dividend instead and don't require filing a K-1. BEPC shares are eligible investments for financial institutions that don't allow partnerships. That's why Brookfield introduced them and it's why they tend to trade at a premium to the partnership units. I recommend both at a price of 40 or less for those who don't already own them. Both are plenty liquid trading NYSE. I generally prefer BEP, which are now about 10% cheaper than BEPC. But they track each other well and BEPC may be preferable for those who dislike filing K-1s.

Bill

4:13

What is your #1 Pick assuming gas/oil will trade higher?

Elliott Gue

4:13

Really tough to narrow it down to just 1 name. I'd say if you want to go more conservative it's tough to go wrong with a supermajor -- XOM is my favorite -- which offers a decent 3.5% dividend plus capital appreciation potential. For more leverage to commodity prices, I'd check out a name like CHK on the natgas side, where you have significant appreciation potential if gas prices recover later this year and into 2024 as we expect.

4:21

Are there companies in your recommendations that are accessing the capital markets that we should be more cautious now due to the higher cost of capital. Example NEP?

Roger Conrad

4:21

Hi Rk. I would not characterize NextEra Energy Partners as a company being forced to access high cost capital at this time. The company does carry significant floating rate debt--but it's all at the project level, where the company's contracts have revenue adjustments. There is $2 bil coming due at the parent level in 2023 and another $2 bil in 2025--but it's in the form of mandatory convertible preferred stock so again will not require rolling over at a high rate. Parent level debt to EBITDA is a modest 4X, very sustainable given revenue is 100% contracted with 14 year average remaining life. What we have seen the company do is file to sell $500 mil in common equity on an opportunistic basis through its "at the market" plan. These offerings are discretionary and have tended to be heavily supported by parent NextEra Energy, which keeps their cost low. Next earnings are late April. But I don't see anything that doesn't indicate NEP will meet guidance.

On the broader question of being cautious about more

Roger Conrad

4:23

levered companies, the answer is definitely yes. I intend to have a more detailed analysis of utilities' balance sheets in the Utility Report Card of the upcoming April issue, as I do every three months. Look for more on recommended energy companies in issue of EIA--including the most recent issue. And the REIT Sheet will highlight the 85 member coverage universe in that advisory later this week.

4:28

Thoughts on ET’s latest acquisition. Also, do you see more midstream consolidation?

Roger Conrad

4:28

I like this acquisition a lot--it adds some very good oil pipeline and storage infrastructure coming out of the Permian Basin and will greatly increase Energy Transfer's throughput to Cushing, OK as well as the Gulf Coast. it's credit neutral initially but I think very positive going forward as the company has new opportunities for cost savings as well as investment. And it's even initially accretive to free cash flow and distributable cash flow per share. It's always possible we'll see the increasingly anti-consolidation Biden Administration step in. But FERC at least seems to have a makeup that will approve.

I do believe more US midstream consolidation has been overdue for several years. Regulatory and other burdens are much more easily carried by larger companies. The challenge in there are only a handful of companies financially strong enough to do deals like ET's $11 bil plus in three years. Also, the primary targets are private capital holdings--so don't count on a weak midstream to get bailed out.

Roger Conrad

4:29

The best midstream companies are still the handful of the very strong in our EIA Model Portfolio.

Buddy

4:38

Roger, I have been accumulating D in the low to mid 50s. Could you give me the names of a couple of the UTES that look cheap to you? Thanks.

Roger Conrad

4:38

Hi Buddy. In the latest CUI issue, I featured NextEra Energy has my best fresh money buy for conservative investors. It's up a little bit since but still I think at a good entry point. It's been pointed out the stock trades at a premium to the rest of the group, which means a higher bar of expectations. But growing earnings and dividends 10% plus a year--and with a highly visible path to continuing that--it deserve that premium compared to companies growth 5-7% annually on average. And when renewable energy returns to favor eventually, it's not hard to see this stock well over $100. Another low risk utility with a very strong potential upside catalyst now is Southern Company (NYSE: SO). The issue is getting the two new nuclear reactors up at the Vogtle site. But as I answered in a prior question, Unit 3 is splitting atoms and Unit 4 is in hot functional testing. SO is in the home stretch and is due a big dividend and share price boost when Vogtle is running.

Terry

4:40

I find it difficult to understand the stock market’s focus on minuscule rate changes when the larger issue seems to be a supply of money that vastly exceeds the intrinsic value of things to own. Where would the stock market and other asset prices be today without the massive injections of new money from quantitative easing and government deficits? Some money is going away via quantitative tightening, crypto crashes, bank crises, loan defaults, etc., but it still seems that surplus money is everywhere to pounce on even the slightest opportunity. The only real value seems to be in few mispriced sectors, e.g., energy.
Where to you believe this is headed? My uninformed view is that money supply contraction may happen. When it does, there will finally be opportunities in the long-term bond market. I still remember when Verizon debt yielded 12%.

Elliott Gue

4:40

Yes, I broadly agree. Some months back I took a look at what drives the stock market and there has been a huge shift in recent years. Prior to 2010 or so, the primary market drivers were fundamentals like a company's profitability, earnings growth, margin and estimate trends (ie.stuff that actually matters when evaluating a business) but since 2010 the stock market has become much more focused on Fed policy and balance sheet trends than those traditional business fundamentals. This trend, already extreme as of late 2019, became turbocharged after the government's coordinated fiscal and monetary expansion starting in 2020. It was literally like nothing we've ever seen before in peacetime -- trillions in new spending, stimulus checks, etc and $4.8 trillion in QE. While that (I believe insane) level of fiscal+ monetary stimulus began to drain out last year, the market has remained laser-focused on policy over fundamentals. Last year, the correlation between the market and the peak Fed Funds rate was more than

Elliott Gue

4:40

70 percent. Again, this is all unprecedented but I would posit a few points. First, not all stocks benefited equal from the post-2010 regime -- it favored long duration growth over everything, which is why US equity markets became a matter of haves (anything growth) and have-nots profitable, cash generative businesses with more cyclical growth profiles like energy. Post 2020 the situation became even more idiotic with money chasing true garbage like meme stocks, digital pictures of gorillas (I'm not kidding unfortunately) and (I think) crypto. I believe what you're starting to see right now is that this "new normal" is collapsing. Excess monetary + fiscal stimulus has ignited inflation and I believe, much like the 70's, that inflation will remain stubbornly elevated for years to come. Yes, a recession will reduce it short term, but it will reignite quickly if and when the Fed eases. The result of excess accommodation is also what Austrian economists call "malinvestment." Essentially, the stock market isn't

Supposed to be a way of gambling on Fed policy or government bailouts, it’s a mechanism for providing capital to businesses that create real value. Artificially low rates boosted certain industries, leaving for example tech start-ups awash in cash. It starved others like energy of capital, leading to the lack of investment in new supply that’s causing the current commodity supercycle. The “good” news is that the reversals of this money/stimulus “malinvestment” bubble will likely benefit some of the stocks and sectors that suffered since 2010. Also like the 70’s I suspect there will be shorter economic/market cycles over the next 5 to 10 years where there will be opportunities to move in and out of stocks/bonds generally rather than a “secular” uptrend such as we’ve seen since 1982.

Hope that helps...I know it was a long answer.

Cindy

4:43

Hi Roger, My nephew wants to open some DRIPS for his two daughters (ages 4 & 5). Do you think VZ and TRP would be good choices? I know VZ is one of your recommended DRIPs, but what about TRP? Thanks so much for all your great advice. It helps me keep my head in times like this!

Roger Conrad

4:43

Hi Cindy. I think TC Energy's dividend is quite safe after the 3.3% dividend increase this month. And I think if it can get the Coastal GasLink pipeline running by early next year, we will see a big boost in the share price back to the neighborhood of $50 or so, where it traded early last summer. Shares have dropped primarily because of cost overruns at the pipeline, which are primarily due to greater than expected remediation costs because of a drought in British Columbia--as well as increased labor costs and inflation. But the pipeline has strong regulatory and First Nations backing in Canada, as well as commercial backing from producers and would-be exporters of LNG. And the company should be able to offset any higher project costs with sales of non-core assets with minimal negative earnings impact. It's still a recommendation in the Conservative Holdings and Top 10 DRIPS.

Buddy

4:44

Elliott, NOV has pulled back more than 25% over the past couple of weeks along with all the oil service stocks. Could you provide your latest opinion? Thanks.

Elliott Gue

4:44

We're finally starting to see the corrections in the services stocks we've been looking for since last autumn with most names recently down on the order of 20% to 30% from their cycle peaks to date. Of course, they could come in a bit more if the S&P 500 bear market resumes as I expect but we're starting to pivot more in favor of using the dip as an opportunity to buy -- and add to positions in the model portfolio -- rather than remaining defensive.

Eric

4:56

Thanks for holding these meetings! For fresh money, how do you rank the long-term valuations of BEP vs. NEP vs. CWEN?

Roger Conrad

4:56

Hi Eric. I think all three have what's needed to succeed as a generator of contracted renewable energy--that is mainly a very strong parent that has effectively used them as a funding vehicle and is supportive of them long-term, both financially and operationally as a source of asset drop downs to grow cash flow and dividends. For a basic valuation comparison, the two numbers to look at are yield and sustainable dividend growth. At this time, Brookfield yields around 4.5% with target growth of 5-8% that's lately trended close to 5%. Clearway yields 4.9% with target growth of 5-8% that's trended toward 8%. NextEra yields 5.3% with 12-15% growth trending at 15%. My preference is to hold all three. But NEP is the cheapest right now. That discount may be due to the nature of some of NEP's financing, which has basically been to borrow from private capital concerns with an ultimate payoff in stock--as well as concern about dilution from stock issuance. I think an overblown concern but better to spread your bets.

Connecting…

Your current subscriptions

None

E-mail Address	Chat Owner	Status	Remove

Enter your email address to be notified when Sherry Roberts hosts a chat