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4/27/23 Capitalist Times Live Chat

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4:37

I live in a quasi-rural area in middle Georgia and an internet provider is stringing wires on power poles all over my area. I assume this is happening in similar areas throughout the state and possible throughout the country. Residents in my area already have internet if they want it and can afford it. It certainly is not a new service coming at last to offer me access. Certainly in the future decades as my area grows this will be an additional source of access but in the meantime I am wondering if this is not just a misuse of the federal funds recently made available by the government. Can you comment?

Roger Conrad

4:37

Universal broadband access is definitely a federal government priority--and like spending on roads and bridges I think you can argue there's a real multiplier effect on the economy. That is, by boosting access to broadband in rural areas--much of it funded by federal subsidy to local wireline phone companies--you create a platform for attracting other investment and potentially spurring start up of new Internet related businesses. We can argue about whether rural broadband should be a priority, or any of the spending in the $1 trillion plus infrastructure spending package for that matter. But in terms of a multiplier effect, it is potentially one of the most effective ways that government money boosts the economy.

Cindy

4:39

I'm confused about money market rates. I see the 7-day avg return of 4.7% on some of them, but the yield actually turns out to be more like 1.23% no matter how I figure it. Am I doing something wrong or is that correct? For example, I put 10k in SWVXX and my first divedend was $10.25.

Elliott Gue

4:39

Thanks for the question. It depends on when in the month you invest in the fund as interest paid accrues through the month. For example, SWVXX paid income of 0.004196167 on April 17th if you held the fund for the full prior month (that's based on $1 in the fund). It pays monthly so if we multiple by 12 it comes to about a 5.04% annualized indicated yield. If you bought the fund on, for example, the 5th of April, you're not going to get the full payout for the month but should get next month's full payout.

BobD

4:45

Thanks again for hosting these calls. It is really helpful. I'd like to ask about a couple of laggards in the energy portfolios: BKR and CHK. Any thoughts on these now? Thanks.

Elliott Gue

4:45

I covered CHK a bit earlier on in the chat. Basically, as a natgas producer the stock sold off in sympathy with natgas prices earlier this year. Fundamentally, however, front month gas prices are irrelevant for CHGK due to their extensive hedges near-term and better gas prices already priced into the futures curve for later this year. We continue to see the gas producers as outstanding value near current prices to benefit from an intermediate to longer term recovery in natgas prices. Year to date BKR is down about 1.75%, however that's significant outperformance relative to the otehr oil services names. For example, Halliburton is down more than 18% and the Philly Oil Services Index is off 7.4%. So, I suspect, the main driver of BKR's stock has been headwinds from the macro outlook this year (recession) rather than anything specific to BKR itself. Generally we think their earnings have been solid and BKR is well placed to benefit from (in particular) growth in the LNG market.

Guest

4:50

Roger and Elliott: I have a 40 year old son who is ready to start investing for his retirement. I am still relatively new at this, so I apologize in advance for some elementary questions to which your other readers undoubtedly already know the answers. I manage our own retirement portfolios based on your advice from your multiple advisory newsletters. We have a few other smaller portfolios given to our JP Morgan wealth management rep. One other newsletter to which I subscribe advised a "total stock market fund" such as Vanguard's VTSAX because it is designed to "provide investors with easy exposure to the entire US stock market including small, mid and large cap growth and value stocks." I believe you have advocated for us subscribers a client's buying our own individual stocks to avoid that lack of customization that comes with a fund. If my son does not have the time or interest to pursue the investment style that your readers like I probably engage in, then is this type of fund the next best option?

Roger Conrad

4:50

Thanks for that question. Regardless of the current condition of the market--and the occasional lost decades for the S&P 500 like 2000-09--a well chosen portfolio of stocks has consistently been the most reliable way for the greatest number of people to build real wealth over time. That said, I think you've still got to look inside whatever you buy. In the case of VTSAX, it's actually a good bit less diversified than you might otherwise think. The top 10 holdings, for example, are actually almost one quarter of the entire portfolio. Apple Inc recently was 6.1%, with Microsoft 5.3%. And the big 4 tech groups--software, internet, computers, semi-conductors--combined are nearly one-third of the fund, which is roughly the same as the S&P 500. The fund has returned 185% the last 10 years--looks good but less than the 202% from the S&P. I don't think the next 10 will be as kind unfortunately--but this fund will provide stock market exposure and if patiently held should follow the market higher the next 20 years.

Bill

4:53

At the risk of asking about NEP and NEE again, as between the two, which is is likely to have the highest total return over the next five years?

Roger Conrad

4:53

Hi Bill. I think the way to look at it is yield versus capital gains. NEP is going to offer you a much higher yield, even if dividend growth should slow sharply from the 12-15% annual target. NEE has the greater potential for capital appreciation, and I think we'll see past the century mark in the next 2-3 years.

John

4:55

I was wrong about Einhorn's $80 target for CEIX. That target comes from a Benchmark analyst. CEIX is reportedly Einhorn's 3rd largest holding however.

Roger Conrad

4:55

That's interesting. The biggest holders of CEIX institutionally are BlackRock, State Street and Vanguard--the marketing kings of ETFs. The stock is also in 197 different indexes, despite the anti-coal bias of ESG. Thanks for bringing up the name. It's one we have covered at times over the years.

Dan

5:01

Hi Roger, with respect to MDU and the spin off of Knife River, I would think that the closer to the spin off date there would be more interest and a possible uptick in MDU share price. So far MDU share price is following the general flow of the other utilities in an even to downward trend. At this juncture should we be concerned about the Knife River spin off valuation and its relation to MDU share price? thanks for your thoughts?

Roger Conrad

5:01

Hi Dan. It's not surprising that a commodity producer spinoff would be viewed less than enthusiastically by investors with the Federal Reserve squeezing the economy and recession risk rising. But from all indications, the company is successfully executing the spinoff, with the recent bond offering both upsized and at a lower interest rate than expected. The new board has been named as well as the CEO. And there's an NYSE symbol KNF. We'll get another update of the spinoff--and very likely plans for the construction services unit--when MDU announces Q1 results May 1. My view is the sum of the parts of the company is mid-30s or higher--but depending on the macro environment we may have to hold KNF a while to get it.

Ron

5:03

I know there have been several questions regarding NEP but would this be a good entry point for beginning a 1st time position in the company.

Roger Conrad

5:03

Hi Ron. I think definitely yes from a value and yield basis. So far as if we've seen the bottom for the stock, that I couldn't say with a lot of confidence as it will depend on the broad market. But betting against NextEra has been a loser for a while now.

Buddy

5:07

Elliott, The recessions you cite in 2001 and 2008 took place after the presidential elections in 2000 and 2007. This is the way it usually works, the party in power does everything it can to hold the economy together until the election takes place. Maybe you are correct and the current administration has lost control of the narrative but I would not underestimate them to pull out all stops to hold things together until after Nov 2024.

Elliott Gue

5:07

The recession did start in 2001 and the election was a few months before in November 2000. But the Fed didn't cut until after the election and the stock market was already crumbling by November 2000. In 2007, however, the recession started in December 2007, the market peaked in October 2007, Lehman Brothers went bankrupt in September 2008 and the election was in November 2008 not November 2007. So, in the latter case they didn't manage to keep it together until after the election. Granted there are examples of US administrations that have pushed stimulus to win an election -- I think 1972, when Nixon destroyed McGovern with 520 electoral votes to 17 -- is a classic example. It's often postulated that Nixon pushed the Fed to keep rates low through the election. After the election, of course, inflation took off in 1973, the market peaked in January and the 1973-75 recession was the worst since the Great Depression. However, my point was more to caution that clean examples of the Presidential cycle "working"

Elliott Gue

5:07

perfectly are more the exception rather than the rule. And, in this case, I do think the combination of divided government and a massive inflation problem limit their maneuvering room. Honestly, I am not sure whether it would be better politically to have the economy growing with oil at $130/bbl or a mild recession and oil at $70, but I think it might be the latter, especially if the worst of the recession/bear market were over by then. I mean how do they bring down inflation without slower growth? The SPR is dwindling, so that's not going to work again.

Sohel

5:10

Hi Roger, You seem to like T, VZ dipped in sympathy when T dipped. Do you like VZ at current prices too? Thanks for holding these chats - extremely useful.

Roger Conrad

5:10

Thanks Sohel. Verizon seemed to get a better reception for its Q1 results than AT&T--and I suspect the reason was a much better on its face free cash flow number. They like AT&T also affirmed their 2023 full year guidance across the board. But what I liked most was the apparent business momentum particularly in fiber broadband but also in wireless--where they continue to cut costs while improving network capability. Even in the business-to-business market, they saw strong wireless revenue growth and added contract customers. I've said for a while that at 8.4 times expected next 12 months earnings, investor expectations were really low for Verizon and wouldn't be hard to beat. That explains the recent upside in my view for the stock. But I think this is one to stick with and will likely outperform a downturn.

Willy

5:16

Any thoughts on NOV’s quarter? Are you likely to add this one to your universe? Thanks

Elliott Gue

5:16

I touched on this one in answering an earlier question. Bottom line, one of their suppliers experienced an issue and they had limited availability of drill pipe in the quarter. While that might seem a minor issue, it isn't as they were forced to buy in supply from an alternate vendor at a higher cost, hitting their margins. I haven't had time yet to go through their entire call -- it's the height of earnings season so I'm a little backlogged at the moment -- but given the attention paid to that issue, I suspect that's why the stock dropped. Longer term though I think they have strong leverage to "Offshore and overseas" as a theme. We already follow NOV and it is the sort of name we might consider adding to the model portfolio later on this year.

Roger Conrad

5:17

Q. Looking at all your newsletters, is there any one that consistently outperforms the others over the past 2/5/10 years, or that you see outperforming going forward?—Eric F.

A. I don’t know if I would say any of our services has particularly outperformed the others. What I would say is that they’re all designed with different investment needs in mind. For example, if you were more interested in capital appreciation and had none in income, you’d want to focus on Creating Wealth rather than CUI Plus/CT Income. We do provide performance information for each publication on an ongoing basis, including for each individual stock.

5:20

Q. Would AT&T (NYSE: T), RioCan REIT (TSX: REI-U, OTC: RIOCF) and Hannon Armstrong Sustainable (NYSE: HASI) be worthy of fresh money at these levels?—John R.

A. Yes to all three. AT&T has reported Q1 results and I’ve commented on them at length during this chat. RioCan announces on May 10, but this spring’s dividend increase bodes well for results. And Hannon will take its turn May 4, also in the aftermath of a solid dividend increase. All of them would probably give more ground in a stock market selloff. But they should be on much higher ground in the next 18 to 24 months.

Robert B

5:22

Doe you have any thoughts (pro or con) about STR (Site royalties) or CTRA (Coterra Energy) ? Thanks.

Elliott Gue

5:22

I must confess I don't know STR all that well -- they're a royalty name focused on the Permian (which is a great place to be) but I'd have to take a deeper dive into it to give you a more definitive answer -- I'll add it to my list of names to look at. CTRA -- the old Cabot Oil & Gas -- I do know well and it's probably a name we'll cover in an upcoming feature on producers with more gas exposure. Basically, I think they're a more conservative way to play a longer-term recovery in natural gas than out current top pick in the shale gas names (CHK). They're a quality producer with low production costs and they return capital via a combo of base dividends, variable dividends and share buybacks.

Roger Conrad

5:26

Q. Hi Roger. Please give an update on Hess Midstream (NYSE: HESM) that has been recommended in the past. Still like it? Thanks—Rick P.

A. Thanks Rick. Hess just announced Q1 results this week and basically affirmed all of ties guidance for 2023. That backs up the dividend increase. And the company also generated enough free cash flow to cover CAPEX, debt service and dividends. If there is a concern, its lower minimum volume commitment levels under existing contracts and an -8% drop in crude oil gathering on lower third party volumes. But parent Hess Corp (NYSE: HES) is the most important customer and financial backstop—and its support remains solid. HESM is still a buy for those who don’t already own it.

5:29

Q. Mr. Conrad, I have been following your advice for at least thirty years although I don't understand it all the time, but I have done well and now I would appreciate another bit of information. You recommend putting excess cash in the VWITX how does that compare to the Schwab SWVXX fund. Thanks in advance.—Nolan C.

A.Thanks Nolan, glad to have helped you. Short answer to your question is they’re pretty much going to do the same thing. Vanguard’s fund is more focused on US federal agencies, whereas the Schwab fund has dollar securities issued by foreign governments. I guess in a US government default, Schwab would be less exposed. But for all practical purposes they’re quite similar.

5:32

Q. Hi fellows! Really enjoy all your publications. Roger or Elliott, what percent of a 75 year old‘s total portfolio should be in energy? I know that there are no hard rules ...approximately? A current subscriber--Aaron S.

A. Thanks Aaron. Our general rule has been no more than 20% in any one sector, for anyone. We are very bullish on energy, and as you’ve heard us say we think we’re still in the early innings of a long-term up-cycle. But diversification and balance are fundamental principles for building wealth.

Darrell

5:34

Hi, what do you believe is a reasonable overall allocation % to "energy" currently, particularly given the thesis of an impending reflexive dip if/when a recession emerges (~10%)? And after that, as we "back up the truck", what type of allocation % would be a suitable target (~15-20%). Just curious for your broad brushstroke estimate. Thanks!

Elliott Gue

5:34

It's hard to imagine, but energy has only a 4.7% weight in the S&P 500 right now compared to 15%-16% at the peak of the last cycle. Our view has been that if the world is to produce enough supply to meet growing global demand for energy that paltry weight is going to need to increase significantly -- you can't have such an undercapitalized industry investing the sums needed to end the current supply problem (undersupply). So, we're believers in being significantly overweight energy through the cycle. Generally I think we've talked about an overall weight in that 20% range being a reasonable maximum if it's diversified a bit among the many different sub-sectors. Right now, however, in our model portfolio we've raised a lot of cash -- around 25% cash position right now -- so we're defensive on the group/entire market right now. So, we'd interpret that to mean that this is not the time to be max overweight energy. We'd recommend holding a healthy amount of dry powder to take advantage of dips.

Roger Conrad

5:37

Thanks everyone for participating today. Look for a link to the complete transcript of the Q&A tomorrow. If we didn't answer your question to your satisfaction feel free to drop us a line at service@capitalisttimes.com. Have a great evening!

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