JotCast | 4/27/22 Capitalist Times Live Chat

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4/27/22 Capitalist Times Live Chat

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Elliott Gue

2:49

start to cut rates when recession looks imminent, and this is likely to happen before inflationary pressures are cleared out of the system. 3. The outlook is similar to the 1970s -- dramatic economic cyclicality, relatively high inflation and a "stop-go" outlook for monetary policy.

Guest

2:53

Hi Roger! Thank you for doing this chat once again and for all of your help over the years. In your recent issue of CUI, you mentioned to consider taking profits on companies like CVX, FE, WEC, ATO and SO. We have very small positions in these holdings (between 10 and 25 shares for each company). ATO I think we have about 40 shares. Where we have small holdings in a utility and we hit the target price, do you recommend taking profits by selling only a portion of our shares, or liquidating our entire positions? Thank you so much.

Roger Conrad

2:53

The idea behind my "Portfolio Holdings Trading Above Target" list--a regular feature in every issue of Conrad's Utility Investor--is to provide a simple system for taking partial profits in great companies that have benefitted from favorable price momentum and are now trading at levels that have not been sustainable historically. Most companies that trade above my highest recommended entry points are basically holds--neither cheap enough to buy or expensive enough to sell. But occasionally, stocks will rise above the "Consider Taking Profits" level shown in the table. And when that happens, it's often paid for investors with large positions to take some--though not all--of their money off the table. Chevron, for example, is back below the $160 price where I suggested selling a piece of positions--down a bit more than 10% from its high point. Atmos, FirstEnergy and Southern Company are also below profit taking prices again. Small positions by definition will not affect a portfolio's value, so harvesting gains

Roger Conrad

2:54

is not as important as it is with larger positions. It can be nice to take money off the table at an exceptionally high price before the stock in question comes back to earth. But again it's not critical as it is with large positions. Hope this answers your question.

Lee

2:57

Thanks again for the always valuable chat. Assuming we’re in a commodity and specifically oil/gas super cycle, in a nine inning game where would you say we are now. And, at what point in the energy cycle should we expect mid stream to begin outperforming?

Elliott Gue

2:57

The characteristics of the late stages of an energy price cycle are that a prolonged period of higher energy prices begins to cause demand destruction and incentives a major new investment cycle in new sources of supply. We're clearly not there yet. High energy prices may be moderating demand growth a touch in some markets but, for example, US refined products demand has been running at or above the 5-year average in every week so far in 2022. Also, we haven't yet seen an uptick in upstream CAPEX spend outside the US -- I think you're starting to see signs that companies want to increase spend, but we're probably years away from the dramatic supply response. So, long answer, but I'd say we're still in the 3rd or 4th inning of this up-cycle. Note that a recession would probably weaken demand temporarily as it did in 2001 and 2008 (and back in the 70s) but demand-led downcycles are usually very short -- I think you're probably looking at another 5 to 7 years of energy outperformance.

James

3:03

Hi Elliott. Can you give us your take on SLB earnings, its business, and stock price action? Where do you think fair value for SLB stock is and where would you look to unload it, if at all?

Elliott Gue

3:03

I think my biggest takeaway is that management confidence in a recovery in international spending on oilfield exploration and development for the second half of this year and into 2023 has increased. If anything, the world's newfound focus on energy security implies more spending is needed over the intermediate term on oil and gas development. So, we're not looking to sell SLB at this time -- I still think you could see $60 here at some point in the first half of 2023. I'll have more specifics in the next issue of EIA when I'll be doing a little bit deeper dive into the services earnings.

Alex M.

3:03

Hi Roger. As you know, SJI was recently acquired. I noticed that the baby bonds (SJIJ) have recently plummeted in value... and at such a velocity that it seems like more than just interest-rate sensitivity due to their long-dated maturity. With the pending acquisition, was there an announcement or some press release indicating that the buyer would elect to defer interest payments or something? I am trying to determine if this is just an overreaction to rising rates, or if the sudden decline is due to something more substantive. These Junior Notes are now yield nearly 8%. Any thoughts? Thank you.

Roger Conrad

3:03

Hi Alex. Acquirers assume the fixed income obligations of companies they buy. And suspending interest payments on debt is basically a default, which triggers bankruptcy claims--not really an option. Some of the hit South Jersey Industries' bonds have taken the past few months is likely due to investor concerns about a weaker balance sheet after the buyout--S&P for example has the BBB rating on creditwatch negative for that reason. But the more important reason for price declines is just the meltdown in the bond market. That said, I still think it's likely we'll see more downside in fixed income in coming months, so these yields could get a bit higher.

Bonnie Beth

3:05

Hi Roger! Thank you for doing this chat once again and for all of your help over the years. In your recent issue of CUI, you mentioned to consider taking profits on companies like CVX, FE, WEC, ATO and SO. We have very small positions in these holdings (between 10 and 25 shares for each company). ATO I think we have about 40 shares. Where we have small holdings in a utility and we hit the target price, do you recommend taking profits by selling only a portion of our shares, or liquidating our entire positions? Thank you so much.

Roger Conrad

3:05

Hi Bonnie. I believe I answered your question as "Guest" just a couple questions back. But let me know if there's anything missing.

Ben F.

3:09

Good morning Elliott and Roger -

One way to play oil and gas is mineral and water rights firms.

Thoughts on the model, and Texas Pacific Land Corp (TPL) and Brigham Minerals (MNRL)?

Elliott Gue

3:09

Thanks for the question. We think it's a valid model for a number of reasons including that it's a way of playing the rise in commodity prices without worrying as much about the cost side of the equation (i.e. rising services and labor costs the E&Ps face). Our favorite has been Black Stone Minerals (BSM), which is in the High Yield Portfolio and offers a yield north of 10%.

Guest

3:12

WHAT IS GOING ON WITH MPW

Roger Conrad

3:12

Several analysts covering the company have reduced their price projections in advance of Q1 earnings and updated guidance, which will be released before the market opens tomorrow. The catalyst for these moves appears to be an earlier a cut from buy to hold by the analyst at Jefferies, who forecast a slowdown in FFO per share growth to 2.8% through 2024 from 8.7% of the preceding three years. The analyst appears to be primarily concerned about the impact of higher interest rates on growth, stating MPW "historically underperforms in a rising rate environment."

For me, the key is always business performance. I'll be looking at Q1 results and updated guidance closely for signs of deterioration that might make us want to exit the position. That said, the bar of expectations going into the announcement looks very low.

pete

3:14

looks to me like a rocky road ahead for a while, any recommended stocks to take profits on now?

Elliott Gue

3:14

We recently recommended booking gains on some of the producers including Occidental and Pioneer, which have run up a great deal. We've also reallocated recommendations in the model portfolio in favor of stocks/groups where we see more near-term upside including refiners (VLO); services (BKR) and natural gas (CHK).

Barry J

3:20

Hi Roger:
Quick question for you and/or Elliott on the philosophy of holding an income asset.
From 2014-2109 MMP traded in a range from 60-80. Now it is at 50. I have purchased a substantial amount of shares over the years with prices from 40-48. If I am really only interested in the 8.25% yield because I desire retire income (and do not really care about the price for capital gains as long as its dividend remains stable [like EDP’s]), should it really matter to me if the price is 45, 55 or 60 when I buy? Certainly, I know that the price will affect the yield. But if I plan to hold indefinitely regardless of the price, should I really care about how low or high the price goes as long as I secure an outstanding yield when I purchase? And I consider any yield at or above 8% to be exemplary.
Also, it certainly makes it easier to hold an income asset like EDP and MMP during the down oil years if you are not concerned with its price per share but only the reliable income stream it generates.
Does this make sense

Roger Conrad

3:20

Hi Barry. I think you've answered your own question about why entry points matter--If you buy at $48, Magellan's $1.0375 per share quarterly dividend is an 8.7% income return even before likely low single digit percentage annual increases. But if you buy at $60, it's less than 7%. That said, once you're in, the only reasons to sell would be if Magellan came apart as a business--it's not having proven resilience two years ago--or if the price rose high enough to be worth booking a profit. I think that would be the case if the stock ever approached its late 2014 all-time high at $90 and change. But we're a long way from that. When MMP announces Q1 earnings and updates guidance on May 5, my primary concern will be the health of its business. And if that should deteriorate, you're going to want to sell and move on, even if it means taking a loss. But we can feel secure holding high quality stocks in a decline because they'll always recover so long as the business stays strong.

Alex M.

3:22

Hi Roger. I got a weird error message when I tried to submit my question, so in case it doesn’t post, I’ll note it there again: SJI was recently acquired. The baby bonds (SJIJ) recently dropped dramatically in value… almost more than seems reasonable for interest-rate sensitivity. Have you heard anything about the acquiring company deferring bond interest payments or something? I know there is a clause in many indentures that allows for that, so I’m wondering if that’s the case? Anyway, even though the bonds are long-dated, they now yield nearly 8%, which seems out of line given the company’s stable profile. Any thoughts? Thank you.

Roger Conrad

3:22

Hi Alex. I did answer your question earlier--so message or not it did go through. Again, these bonds have taken a whacking because of what's happening in the bond market. The would-be buyer Infrastructure Investments Fund doesn't have the option of defaulting on existing debt--it would lose control of the company in bankruptcy court.

Alex M.

3:24

Hi Roger. Any thoughts on some of the recent price action in telecom baby bonds? Even with interest rates climbing, offerings like UZD, CTDD, and others are yielding over 7%. Would love to hear your opinion. Thanks.

Roger Conrad

3:24

Again, I think buying fixed income now is basically trying to catch a falling knife. And the very long maturities on baby bonds make them especially vulnerable to rising interest rates--which means yields could actually rise somewhat more. There will likely come a time when these bonds are attractive again. But I still think stocks are your best bet for yield because of their ability to increase dividends.

Hans

3:26

ELLiott, What is your outlook for oil, now that it seems Russia's export will be lower with the sanctions. Thanks

Elliott Gue

3:26

I think what's mainly moving oil now is concerns about the Chinese economy and demand in light of lockdowns there. Russian oil exports are actually still pretty healthy with Asian buyers snapping up cargoes snubbed by Europe -- this month, through the end of last week, Russia's seaborne crude shipments averaged 3.2 million bbl/day compared to 2.88 million bbl/day in 2021 (these are exports via ship, not pipeline). Russia also can still yield a dangerous energy "weapon," and is now starting to curt natgas supplies to several European countries. Fact remains, Europe can't really survive without Russian energy supply. I think oil prices could come down a bit more but I see support in the mid-$80s to low $90s. Longer-term average prices will remain elevated due to a tight supple/demand balance. Biggest risk in my view is a global economic slowdown at some point in 2023.

Tom L.

3:34

Hi Roger and Elliott. As always, thanks for taking the time with us to share your expertise and analysis. With China going all in with their Zero Covid strategy, what impact on oil demand and thus price do you think might happen? Short-term? Longer term? Thanks.

Elliott Gue

3:34

It's definitely a headwind and China may not waver from "Zero Covid" until the fall -- I believe the CCP "Congress" is scheduled for October. That said, the supply/demand balance for oil is still very tight and, so, I don't see prices coming down below the $85 to $90 region this summer. In places like the US, where economic reopening is accelerating, I'm, looking for robust oil demand this summer driving season. I think one significant risk for oil on the horizon could be a global economic slowdown/recession in 2023. However, demand cycles are usually pretty short as it's the multi-year supply issues that drive the main trends. So, we'll probably have to manage around these cycles in EIA but the main strategy will be one of using the dips to buy, while taking some money off the table in extended names during the big rallies.

brian

3:35

Roger, Verizon is down $48.65 do you think we should hold or fold on Verizon

Roger Conrad

3:35

Hi Brian. I think Verizon is one of the cheapest, high quality stocks available at this time, selling for less than 9 times expected next 12 months earnings and a rising dividend yield of over 5%. I think the downside momentum in shares is out of step with the generally solid Q1 results the company posted. Most of the commentary I read seems intent on finding reasons why earnings and the stock could fall further--subscriber counts etc. But the bottom line here is this is still a growing company--with wireless revenue rising 9.5% and overall revenue up 2.1%. And even its worst critics acknowledge what it's done with C-Band to expand the 5G Ultra Wideband network has created the fastest, highest capacity wireless network in the US. Some might believe network quality is irrelevant doesn't matter anymore and/or that a growing market isn't big enough for just 3 major players to be profitable. I just see a cheap unloved stock with a safe dividend and a very low bar of expectations to beat.

Guest

3:40

Hello Roger, any thoughts on Black Hills Corp (BKH)? Their metrics look good in your report card. Are they safe enough to add to my portfolio?

Roger Conrad

3:40

Black Hills Corp will report Q1 results on may 4, which will give us another opportunity to gauge the health of the business. But at this point, I don't see much risk to target 5-7% annual earnings growth guidance through 2026--largely from rate base growth that centers on a conservative CAPEX plan. I can also see this company as a takeover target, with its natural gas distribution units attractive to private capital investment as well. The only caution I would have is the stock trades above my highest recommended entry point of $75. But below that price, this is a steady growth and income stock.

Alex M.

3:44

Hi Roger. Has your perspective changed at all on MPW given the recent headlines? Thank you.

Roger Conrad

3:44

I think we want to see what they report tomorrow morning for Q1 results, both for operating metrics and progress with the operator transfer at the Utah hospitals. As I pointed out answering an earlier question in the chat, there's been a great deal of shuffling around among some of the analysts covering the REIT. And there's concern about the impact of rising interest rates on its ability to grow. If I do see signs of weakening in the numbers and guidance, I'll consider taking a loss and moving on. But at this point, I want to see hard numbers before recommending taking action.

James

3:49

Hi Elliott. Do you think Inflation Protected Securities bond funds (i.e. TIPS) is a safe place to hide for risk-adverse parts of a portfolio? My 401K has limited options so the next safest option I think is money market fund or short term bond fund.

Elliott Gue

3:49

I just wrote a piece on fixed income earlier this week and was doing some research on this last week/weekend. What I find most shocking is that 2022 has actually brought the most serious sell-off in fixed income in the history of the widely followed Bloomberg Aggregate Bond Index, which tracks corporate and Treasury bonds. The problem is that in every market and economic cycle since the early 1980s, bonds have been the hiding place of chose during economic downturns and bear markets for stocks. This is also the basic idea that underpins 60/40 stocks/bonds allocations and "target maturity" type strategies where investors increase their bond allocations as they age. I believe we may now be entering a period more like the 1970s where bonds don't offer much shelter. TIPS are one of the only areas that couple provide some shelter. Another area I recommended in Creating Wealth earlier this week is a senior loan ETF "SRLN." SRLN benefits from rising interest rates because it owns a portfolio of bank loans, which

Elliott Gue

3:49

carry floating rates. More broadly though I think it's going to be necessary to be nimble and careful with fixed income over the next few years as it's just not likely to be the "safe haven" it's been for the past 40 years or so.

Alex M.

3:51

Hey Roger. What's your opinion on the cannabis space of the REIT market? Companies like IIPR, NLCP, and AFCG have seen major declines recently. Thoughts on this area? Thank you.

Roger Conrad

3:51

I added Innovative Industrial Properties (NYSE: IIPR) to REIT Sheet coverage earlier this year. I see it hit a new 52-week low today, and it's down nearly 50% from its high point last November. It's pretty clear this group was hyped up and the air is being let out of the bubble. And these highs and lows are actually pretty typical for a sector that gets the public's attention. The key question is whether or not a sustainable growth model is possible in a business based around a plant people have been growing on their own for decades--and which can basically grow anywhere. I picked up coverage of IIPR in part to see if that was possible. And I'll be looking closely at the numbers and guidance to be reported on May 4. If I see that it can, I'll probably pick up NLCP, AFCG and others as well.

Jeff

3:53

Raymond James is quite bullish on EOG and PXD. Price tagets of $170 and $400 respectively. Would today's prices be a good entry and are their PT realistic?

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