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3/30/22 Capitalist Times Live Chat

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James

3:01

QQQ and ARKK have had a strong rally off the bottom. How do you think this rally will play out and when or where do you believe it will top? On the other hand, if this is the beginning of a rally that has legs, what would tell us that we are wrong and need to cover our shorts?

Elliott Gue

3:01

Generally, the strongest short-term rallies in the broader market happen in one of 3 time windows: 1. Just before the start of a bear market, 2. During a bear market, 3. Shortly after a bear market ends. Bull markets are generally characterized by more slow-but-steady gains that compound over time. So, my broader view is that this is a classic "bear market rally" within a longer-term downtrend for the Nasdaq/QQQ. In addition, while the short-term/tactical indicators I follow flashed an oversold condition earlier this month, the readings weren't at the same extreme levels I've seen ahead of prior major rallies. Now, after the rally of the past 2 weeks, some of these indicators are approaching a complacent/overbought stage. On top of that intermediate-term indicators I follow (such as the pace of money supply growth vs GDP growth) have turned negative due to the (historic) shift in Fed Policy. Nasdaq breadth measures (another intermediate term indicator) remain very negative.

Elliott Gue

3:01

All that said, from a trading standpoint, I'd likely recommend standing aside on QQQ shorts should the index break meaningfully above resistance at its intermediate to long-term moving averages (100-day and 200-day). ARKK is a different story entirely -- the ETF has bounced but it's still down 55%+ from its all time highs in 2021 and it's trading below several key moving averages. ARKK hasn't even managed to break above its early March highs -- this is a broken chart and my inclination would generally be to sell/short the rallies there.

Ron

3:06

Long term outlook for price of Chevron?

Roger Conrad

3:06

Hi Ron. I think it's a little stretched here in terms of valuation--basically $40 a share above what's been our highest recommended entry point ($125) for some time. They are doing great now obviously--and not just because of high oil and gas prices. We liked Chevron's acquisition of Noble Energy at the bottom of the cycle at lot, and our admiration of management's gutsy move then has only grown. But the stock has also made a big move in a very short time and will almost certainly have to consolidate those gains. We hold it as a dividend reinvestment plan in Conrad's Utility Investor--and I do personally as well and have since the Texaco days. I think it does go higher over the next few years, so I'm not interested in selling my DRIP. But this would be a good price for an overloaded account to take some off the table, perhaps investing in the natural gas stocks we'll be adding to the EIA Model Portfolio later this week.

jerjos

3:09

With all the activity around LNG exports to Europe... are any of the LNG Partnerships worth revisiting?

Elliott Gue

3:09

The US can't increase its LNG exports over the next 3 years or so due to lack of terminal export capacity. The US will liokely reshuffle some volumes in favoir of Europe but that's unlikely to offer any real benefit to, for example, partnerships that own LNG carriers (ships). ET is a name in the portfolio that will benefit as well as gas producers like EOG, which will benefit from less-depressed gas prices and a long-tail of exports post-2025. We're looking at a couple of additional more direct plays but, again, the key is to focus on names that can actually benefit from a bump in longer term investment in new export capacity. There's really no short-to-intermediate term gas demand story from Russia-Ukraine.

JT

3:13

Hi Roger, The AT&T preferred Series C shares seem to be a good buy with a safe dividend, trading under 22. What is your opinion? Thanks, John

Roger Conrad

3:13

Hi JT. I don't think there's any meaningful credit risk to the AT&T Preferred C, or really any of their preferred stocks--even if the Fed's anti-inflation policies wind up tipping the economy into recession. On the other hand, they are quite exposed to interest rate risk, as their recent steep decline from a mid-to-upper 20s price to $21 an change illustrates. There is also no possibility of a dividend increase. In contrast, though freshly cut by nearly half--subtracting the value of the 0.24 DISCA shares in the spinoff--AT&T common yields north of 6% (versus 5.5% for the preferred). And there's every possibility of increases as well, as 5G adoption picks up steam, accelerated debt reduction progresses and free cash flow piles up. Bottom line--I see no real attraction in AT&T preferred stock. If you want to bet on the company, go with the common shares. And keep in mind that while the preferred's dividend is slightly more insulated, if AT&T does really get in trouble, it will be as well.

Jack A.

3:21

Hi What are your thoughts about purchasing UNG, especially buying leaps to January, 2024?

Elliott Gue

3:21

Generally, we don't recommend buying UNG as a long-term holding. The ETF seeks to track the price of gas on a 1-for-1 basis and it does a great job of that over shorter holding periods. But, given the volatility of gas, the performance of the ETF will deviate from the underlying change in gas prices over longer holding periods. Second, we're actually bearish on US natural gas prices in the short to intermediate term. Prices are high because of tight storage right now and a cold finish to winter heating season; however, as we move into April, demand will fall seasonally just as we see production from key fields like the Haynesville push higher. We prefer playing gas long-term via quality producers like EOG (we're likely to add another name soon). These companies are better able to benefit from generally higher average gas prices over the next few years than has been the case over the past decade.

Jack A.

3:23

I'm not sure if my last question was delivered, so here it goes again: What are your thoughts about buying UNG as an investment?.... I was thinking of buying UNG, as well as leaps into 2024.. Thanks, Jack A.

Elliott Gue

3:23

We received it -- answer is just above. Long queue of questions this week, we apologize if it takes longer than normal to get to all the questions, but we'll answer them all.

Tom L

3:24

There is much speculation about a recession in either late 2022 or 2023. Roger, I am a long time subscriber to several of your publications (CUI, CUI+, Reit Sheet), and keep asking myself if I am going to see a step to take some profit off the table as prices are high, and possible risk is on the horizon. Your thoughts are always appreciated.

Roger Conrad

3:24

Hi Tom. If there's one thing we know about recessions, it's that the stock market will react to the possibility/likelihood of one long before the economy actually slides into one. So with the Federal Reserve now turning to fighting inflation, this is something that's very much on our minds. I think we protect ourselves two ways with the type of stocks I focus on in CUI, CUI Plus and the REIT Sheet. First and most important, we stick to the best in class, and generally avoid most everything else. If you follow my lead in these portfolios and coverage universes, you will achieve that. Second, we take partial profits when our stocks get to stressed valuations. In CUI, that's when they reach "consider taking profits" levels in the "Portfolio Holdings Trading Above Target" table that I update in every CUI issue. And several are pretty close or over right now--it's an automatic system that takes the emotion out of it.

CUI Plus is a managed portfolio--so I make these moves incrementally that members can follow.

Roger Conrad

3:26

So far this year, I've made two partial sales of portfolio positions. And I made 7 others at the end of last year, with the funds deployed into other much cheaper positions. I have also swapped out positions in REIT Sheet where valuations became stretched.

3:28

It's an incremental strategy and I will likely step up activity if prices get more stretched. It also keeps us invested in the meantime and earning dividends. And finally, if we do get caught up in a big selloff--as we did in early 2020--sticking to the best in class prevents paper losses from becoming permanent. So long as businesses stay strong on the inside, stocks will recover--as they have in the 35 plus years I've been in this business.

John C

3:32

Thoughts on Devin Energy and Coterra at current prices?

Elliott Gue

3:32

Generally, we like Devon (DVN), which is a high-quality shale E&P with a solid plan to return capital to shareholders. The main reason it's not in the portfolio is that we have other E&Ps there that offer exposure to the same basic plays and themes. CTRA is the old Cabot Oil & Gas (COG), which acquired Cimarex (XEC). A very well-managed company focused more on natural gas that was early to prioritize free cash flow over growth. However, I still can't get my head around the XEC acquisition in terms of value there and other names probably have more operating leverage to higher gas prices now. So, not a bad long-term holding but we see better opportunities elsewhere.

Paul

3:34

Canadian stock Vermilion Energy Trust? Have held it for a long time, including through its swoon. Is it likely to return to paying a dividend within an interesting time frame?

Roger Conrad

3:34

Hi Paul. Vermilion actually declared a dividend of 6 cents a share this month for payment April 18 to shareholders of record March 31. It's not what they paid before prices starting dropping in 2018. But as they continue earning high levels of free cash flow to cut debt and make strategic acquisitions, they will certainly ramp that up going forward. And management has also promised stock buybacks on an opportunistic basis. As I noted in an answer earlier in the chat, I think this stock should be trading in the low 30s at least in the relatively near future--good assets in western Canada as well as western Europe at a good time in the energy price cycle.

Buddy

3:37

Could you give your latest update on SLB, HAL and BKR? Are there any other interesting service stocks you might recommend? Thanks.

Elliott Gue

3:37

SLB remains our favorite due to two main points: 1. We think the international cycle is turning in a big way and that's likely to accelerate due to the obvious global oil shortage laid bare for all to see by the Russia-Ukraine conflict. 2. SLB focused on a lot of self-help measures during the downturn, and we think profit margins will rebound quickly now that the cycle has turned. I'm going to have some more detailed comments on the services space in the next issue, likely out tomorrow, so stay tuned as we'll have more recommendations shortly -- this is a corner of the energy market where we're seeing new opportunities.

Jack A.

3:47

Roger: I read in today's WSJ that many countries are looking to Canada for commodities to replace what they're losing from Russia.............. Do you see the Canadian dollar advancing because of this, and what energy stock do you see having the greatest upside potential going forward?

Roger Conrad

3:47

Hi Jack. Yes, I think the strength in commodity prices and the fact that Canada has been a reliable trading partner over time should be a plus for Canadian resource companies and the Canadian dollar going forward. We have seen some strength in the currency this month, which is a stark contrast to most currencies versus the dollar. If you're looking for reasons to be less positive, the country has a minority government and the Liberals haven't been known for policies that support the loony's value. Canada also hasn't come out of the pandemic as fast as the US and the US dollar is still very strong. But I do think the tailwind of rising commodity prices will be the stronger factor the next few years. As for stocks, we hold Pembina Pipeline and TC Energy in the EIA Model portfolio and numerous Canada-based companies in CUI, as well as CUI Plus (Algonquin) and REIT Sheet (Canadian Apartment etc). The primary reason is business strength. But a higher CAD will help returns.

Jack A.

3:48

Thanks, Jack A.

Roger Conrad

3:48

Thank you for participating today. I did answer a couple of your pre chat questions as well at the start of the chat.

Guest

3:59

Roger and Team - thoughts on the increase in food and its negative impact on food stocks, like Kraft-Heinz. I am seeing more and more articles about customers buying cheaper, private items. Cheers, Ben

Roger Conrad

3:59

Ben, this is definitely a concern we've had about Kraft Heinz since inflation started becoming a problem. The question has been how well the company's streamlining and focus on building key brands would offset the obvious commodity price pressures. And they've consistently answered it well--most recently with Q4 results and guidance that recently boosted shares from mid-February lows. I won't say we're not going to put this company under the microscope every time they have significant news--particularly next in late April with Q1 numbers and updated guidances. But at this point, they appear to be expanding market share where they need to, controlling costs and reducing debt on schedule--with the result that both S&P and Fitch rate the outlook for the credit rating as positive. S&P already has it investment grade, Fitch is one notch below.

Dave

4:07

Hi Roger and Elliott, could you please provide your current thinking on Enerplus (ERF)? Thanks for all you do!

Roger Conrad

4:07

Hi Dave. I think they've definitely weathered the down cycle in their industry and back in expansion mode. The Q4 results and guidance announced in February were robust. We're rating the stock a buy up to 12 but may raise that. Longer-term I think they're benefitting from a lot of cost cutting as well as improved pipeline capacity out of key production regions--as is the case with many Canadian producers. The dividend is now variable. But I think we'll see an upward trajectory going forward, as debt comes down and production and selling prices go up.

Jeff

4:12

Hi Roger & Elliott, could you give me you opinion on BPMP?

Roger Conrad

4:12

Hi Jeff. Management has accepted a takeover offer from general partner and 54.35% owner BP Plc for 0.575 ADRs per BPMP unit. The exchange appears to be taxable to BPMP, since it involves swapping MLP units for C-Corp shares. It also includes a tacit dividend cut of about 54% in the exchange ratio. There should be upside in BP shares after the deal is closed, which is expected imminently. And we do rate BP a buy at 30 or lower. So at this point those who haven't sold might as well hold on.

Dave

4:18

Hi Roger, a question I would like to ask is on Arrow Financial (AROW). You've noted in the past that Arrow may be a potential takeover candidate. I was wondering what you may anticipate as a possible takeout price range on the stock. At a $33.00 price, the P/E is under 11, while the price-to-book value is over 140%. Which of these two ratios would be a better indicator of value for Arrow in your opinion? Or would it be something else? Thanks very much for your help!

Roger Conrad

4:18

Hi Dave. I think the primary reason to hold Arrow is that it's a very solid regional bank with a very safe and generous yield, which is likely to grow its dividend at a mid-to-upper single digit percentage rate in next few years from a combination of cash increases and stock dividends. In the past, takeover offers for similar sized financials have been at significantly higher multiples to cash flow than AROW's 7.6 times--particularly when the banks in question have had such solid capital ratios. And I would expect we'd see the same if there were to be a successful offer here, maybe equating to a mid-40s price for the stock. I'm not sure either price/earnings or price/book would really be that relevant to the prospective takeover valuation, especially in this case.

Chris.

4:25

I’m a new subscriber to CUI+. What is the difference between Energy + Income Advisor and CUI+ news letter? Are there different goals? I previously subscribed to the now defunct Profitable Investing.

Roger Conrad

4:25

Hi Chris. Based on what I know about Profitable Investing, CUI Plus may be more what you're looking for. It's essentially a managed portfolio that holds positions primarily in dividend paying stocks, drawn from a wide range of sectors with strong business health and growing dividends as key criteria. I advise on how much of each position to hold. And every twice monthly update has analysis on each position, as well as macro commentary. The key goals are generating a high level of current income, conservative wealth building while limiting risk and controlling volatility.

Energy and Income Advisor is the most comprehensive advisory you'll find anywhere on investing in energy. We have a Model Portfolio, a High Yield Energy List and extensive coverage universes on midstream/MLPs, Canada/Australian energy stocks and E&P/Service companies. We also forecast commodity prices and provide an Endangered Dividends List to help readers weed out the weak.

Roger Conrad

4:26

Hope that helps. You're also free to check out anything we publish. Call Sherry at 1-877-302-0749 for more information.

Sohel

4:31

What's your view in AMT in the REIT space for entry at current prices for a hold term hold for retirement income? What is the level of risk?

Roger Conrad

4:31

Hi Sohel. I think American Tower is a very solid company with almost a utility-like business model. Management will be put to the test to successfully absorb the recently acquired data center REIT CoreSite. And I think a lot of the caution you now see in the shares related to that expansion move. I still think the shares are a bit rich at their current level. I do want to see what they report in late April--which will be the first full quarter of them owning data centers. And I'm not entirely sure to make of the last sequential dividend increase, which was a penny a share versus 8 cents in the previous quarter. That's pretty much why I rate this stock a hold rather than a buy at this price, at least until we see a quarter of results running the data centers.

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