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5/30/23 Capitalist Times Live Chat
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AvatarRoger Conrad
2:03
Greetings everyone and welcome to this month's live webchat for our Capitalist Times members. As always, there is no audio. Just type in your questions and Elliott and I will get to them as soon as we can in a concise and comprehensive way. We will send you a link to a transcript of the complete Q&A, probably tomorrow morning depending on when this ends--which as usual will be when there are no more questions left in the queue or from the emails we received from some of you prior to the chat. Thanks for participating today. Now lets get started!
AvatarElliott Gue
2:04
Good afternoon everyone, I look forward to answering your questions.
Frank
2:10
MMP: buy/sell/hold or substitue
AvatarRoger Conrad
2:10
Hi Frank. We haven't changed our advice on Magellan Midstream (NYSE MMP) since the offer from ONEOK Inc (NYSE: OKE). The shares are currently trading within a few percentage points of the cash and stock offer, based on OKE's current price. But we see considerable upside later this year for MMP shares, as this deal closes and the energy upcycle enters its next phase. And by the time this cycle reaches a peak, a combined MMP/OKE should trade well north of the March 2020 peak--which was in the neighborhood of $80 per OKE share. There's also the possibility we see a higher bid for MMP, which if it came from an MLP like Enterprise Products Partners would not have taxation consequences. The OKE acquisition is a taxable event, just as selling MMP shares ahead of the merger would be. Also, MMP's solid Q1 results demonstrate it will do well should this deal fail--I don't think that's likely but the Justice Department must approve this merger.
bob
2:10
i dont see any questions - is it my computer
AvatarRoger Conrad
2:10
Hi Bob. We're definitely seeing questions. Please try retyping yours.
AvatarElliott Gue
2:15
Question: When do believe, oil will rise to and above 80 again? Which stocks do you think will benefit in price appreciation the most should such a rise take place?
Answer: Oil is trading around $70 right now, in-line with where it was in December. We see range-bound action near-term with a floor near current levels ($65 to $70/bbl) and a ceiling in that $80/bbl region (for WTI). That’s because oil is caught between a floor of tight supply and OPEC+ discipline and a ceiling due to concerns bout demand and a global recession. We do see oil averaging above $80/bbl in 2024 as demand (always) rebounds coming out of a weak economic environment while supply will remain constrained due to lack of investment in new production projects. The biggest beneficiaries would be oil services stocks like SLB/BKR and the oil-focused producers we covered a few issues ago. We do, however, see more near-term upside on the gas side of the equation as gas producers are already pricing in sub $3/MMBtu gas, which isn’t likely to persi
persist for longer than a month or two.
Guest
2:16
Good Afternoon Elliott & RogerI hold NEE, NGG,
AvatarRoger Conrad
2:16
NextEra Energy (NYSE: NEE) is still the best positioned utility in the US for the next several years--in large part because of its strong south Florida utility unit but also because it's been the first mover of wind and solar in the US outside its service territory. And even without the tax credits from the Inflation Reduction Act, they'll have no problem investing enough to keep growing earnings at the target 6-8% a year. The stock has come down a bit--still trades at a premium to other utilities. But I don't see that changing and the stock is a buy up to 80.

National Grid this month announced solid FY2023 (end Mar 31) results along with an 11% dividend increase. I'm still a bit wary of possible adverse changes in UK regulation, particularly if Labour wins. But results justify at least a hold of the stock and its nearly 7% yield. Look for more in the June CUI Utility Report Card.
Alex M
2:22
Hello gentlemen.  Thanks again for these beneficial chats.  Could I please get your thoughts on the pharma space?  Some of the big names like AMGN, BMY, and PFE are trading near their lows.  Do you like any of these names since their valuations have come down recently?  Thanks.
AvatarRoger Conrad
2:22
Hi Alex. We currently hold two big pharma stocks in the CUI Plus/CT Income Portfolio--Abbvie (NYSE: ABBV) and Merck (NYSE: MRK). Our view has been both have been expensive this year, and we've taken advantage of temporary price spikes in both to lighten up. That now appears to have been the right call, as both have come down--though not as much as the stocks you list. They're still actually a bit expensive. And with basically almost everything not related in investors' minds to AI selling off this month, they're likely to come down even more. So while we're not inclined to sell, we're not particularly eager for investors to commit fresh money just yet. That would apply to Amgen, Bristol Myers and Pfizer as well and Johnson & Johnson (NYSE: JNJ)--though these companies have performed well in recessions such as we expect. And the day will come when they're so cheap we'll be using the roughly one-third of the portfolio now in cash--very likely to add to the pharma sector.
Matt
2:23
I didn't think I would be available today so I emailed in questions, but I ended up making it.
AvatarRoger Conrad
2:23
Great! Thanks for participating.
Michael L.
2:23
Hi Elliott,

 CF closed below $65 again so I put in a sale order. But today I picked up more of CF at the "scaling in" price of $62.50 we set up. My sale of the original CF purchase hasn't closed yet because I set a limit a little above the market today. It seems these trades are at cross purposes, to some degree.

Should I hold the original purchase of 60 shares of CF now that the stock has slipped further (it's trading around $61.30 as of this writing?). Really appreciate your help.
AvatarElliott Gue
2:23
Thanks for the question. Because I see the outlook for CF as so favorable longer term, I took the unusual step of recommending you buy back the stock (which did trigger our stop earlier this month). In addition, I set up a 2 new scale-in buys on CF to actually add to the position if it dips a bit further. The bottom line is that I recommended just holding on to CF if you did not sell it at the original "stop on close" level and then buying an additional 20 shares at $62.50 and 20 more at $57.50. I have set a new stop on close level of $42.50 on CF -- I revised it lower from $65 to $42.50 in the last issue to reflect that we re-entered the stock.
Jeffrey H.
2:32
Dear Folks, AES has dropped below your dream price of $20. Any particular reason for the decline? Do you still believe this is a good/great price to accumulate shares? Also is there any greater benefit in purchasing AESC? Would you recommend holding some of both?
Thank you
AvatarRoger Conrad
2:32
Hi Jeffrey. There's no business related reason for AES' decline. The company reaffirmed its previous 2023 guidance last week, and management actually extended its 6-8% target for compound average annual growth through 2027--which will be fueled in large part by adding 25 to 30 GW of renewable energy capacity and exiting coal by the end of 2025. The company also demonstrated it can still access debt capital on reasonable terms with a 5-year "green bond" offering at 5.45%.

AES is a member of 177 stock indexes and ETFs, including the Dow Jones Utility Average. And most stocks outside of what's considered AI are getting sold off on worries about recession and inflation. That could go on for a while and we wouldn't be in a hurry to commit fresh money to stocks. But I'm certainly comfortable holding onto AES at this level of valuation--and notably there's support both from insider buying and analysts tracked by Bloomberg covering the company.
Kerry T.
2:32
Hello Elliott:

In the April 11, 2023 Creating Wealth you wrote this:

"We’re at a stage of the cycle where the data is near a tipping point – I’d expect either a rapid recovery to levels that indicate the economic weakness is fleeting, such as we saw in 1996, or serious deterioration that makes the soft-landing view widely unpalatable, within just a month or two.

I continue to see the latter as more likely and, if historical relationships hold, clear evidence of the slide into recession is likely to coincide with an acceleration to the downside for the broader market."

Are you still seeing the economy tipping towards recession or is it starting to look more like 1996?

regards
AvatarElliott Gue
2:32
I'm still looking for the economy to tip into recession later this year. Some of the data has been modestly better-than-expected but inflation data has also been hotter than expected. So positive surprises likely mean higher-for-longer rates and a continued, deeply inverted yield curve. We are beginning to see signs of credit contraction and the latest data from the Fed shows that excess consumer savings built up from COVID stimulus have declined sharply to around $400 billion from a peak north of $2.1 trillion. Indeed, the broader market would be sharply lower were it not for the 5 largest stocks in the index. The S&P 500 Equal-weight, for example, is now down 2.5% so far in Q2 and flat year-to-date. Historically rallies driven by a shrinking number of stocks aren't sustainable. So, i continue to see the recession/more market downside outcome as the more likely.
bob
2:33
i was hoping to see all questions and answers
AvatarElliott Gue
2:33
You should see all the questions appear as we answer them. We will also send out a transcript of the entire Q&A, likely tomorrow morning.
Jim T
2:38
Looking to invest in infra-structure materials.  Your assessment of CX versus CRH.  Thanks Jim T
AvatarElliott Gue
2:38
Generally I prefer CRH because if it's vertically integrated offering both raw materials and finished products. I also believe CRH has a stock-specific catalyst in the form of their planned move of primary stock listing to NYSE. Shareholder meeting is slated for June 8th and this move will result in their inclusion in US indices later this year (that brings more passive/ Index money into the stock).
Jeffrey H.
2:38
Dear Folks, A number of utility stocks have been declining. I am mostly interested in reasons for the drop in AEP and DUK.  Would you rate DUK as a better buy? I understand the rationale for buying incrementally when value shows itself, but do you suspect that we are still a ways from the bottom? Also, do you think that utilities will hold up better in a recession than other sectors -- or at least recover more qjickly? Thank you.
AvatarRoger Conrad
2:38
Utilities will definitely hold up well as businesses in a prospective recession--that was the clear message from Q1 results and guidance updates, about 90% of which I review in the current Utility Report Card with the rest to come this month. There may have been some selling based on Republican demands in debt limit discussions to roll back Inflation Reduction Act tax credits. But that never materialized and the inclusion of some version of permitting reform in my view indicates broad support for energy investment in Congress at least in the center of both parties. Bottom line--this concern is overblown, though AEP now appears to be facing a challenge to its renewable investing plans in Texas similar to what Dominion had in Virginia. And Duke which does not have those concerns would be my preferred place for fresh money.

As far as stocks, utilities are likely to lose ground in a selloff that's the result of a recession, just as they have in previous downturns. In my view, that's a good reason to take it slow
AvatarRoger Conrad
2:39
when it comes to committing fresh money. But I'm comfortable holding AEP, DUK, D and other high quality utility stocks with recession risk rising.
2:47
Look for more on that--including the best stocks to bet on-- in the second half of the EIA issue for this month, which we'll post this week.
John C.
2:48
CF - Please Opine On Valuation & Recommendation How will it do through the coming inflationary years?
AvatarElliott Gue
2:48
I still like CF and have been adding to the allocation in the model portfolio on the recent decline. The market is currently punishing all commodity producers and cyclical companies, including CF, because the knee-jerk trade is to sell these stocks when the economy is weakening. However, I see valuations for CF already reflecting significant economic weakness even as fertilizer demand has picked up of late with demand outstripping supply in the Corn Belt region. Inflation is generally bullish for commodity prices -- including corn, wheat and other "softs" -- which is longer-term bullish for CF as well.
Matt
2:51
First question was what are your thoughts on ARLP as a long term holding?  I see that it's considered speculative, but to my untrained eye the company appears very undervalued and very solid financially.
AvatarRoger Conrad
2:51
Finishing up with ARLP--earnings and dividends basically rise and fall with coal prices. That's why it earns the "speculative" rating. Also, coal still has a lot of years left as a fuel source. But it is getting phased out in the developed world, and the developing world has plans to switch as well. In addition, there's also heightened legal risk compared to other sources of energy. And while Alliance has been good securing export markets, it's always possible keep it in the grounders will succeed in hamstringing its production with new regulation in coming years--as well as transportation. Just more risk than say a natural gas producer.
Matt S.
2:51
1. Could you discuss thoughts on ARLP as a potential long term holding? I see that it’s considered speculative, but the company seems way undervalued and the financials all appear to be really great to my untrained eye.

2. Do you believe the more oily producers will continue to have an advantage over the more gassy producers going forward? Currently holding a lot of PXD at cost basis just over $200/share and wondering if I should sell some and diversify into some EOG.

Appreciate your work
AvatarRoger Conrad
2:51
Hi Matt. I agree that there's a lot of money to be made in US coal at least in the next couple decades, even though it will primarily be exports rather than reliable long-term contracts with US utilities. And Alliance Resource Partners (NYSE: ARLP) would be my preferred way to play it--for its conservative structure and dividend strategy of paying investors a dividend that's essentially at a variable rate that will rise when coal prices do. That said, Alliance did omit its dividend for roughly one year in 2020 when coal prices plunged. And with commodity prices backing off starting this winter, we're likely to see a much lower payout by early 2024. I think that's mostly already reflected in the share price. But a recession or a steeper than expected payout cut would likely take shares down to at least the low teens--it was under $3 for a long stretch in 2020.

We actually believe gas producers will have an advantage over oil the rest of the year--that's one of the themes we see coming out of Q1 results.
Jimmy
2:54
Much has been said about the poor breath of the rally as a select group of megacap stocks lead the popular indexes higher.  My question is can we just short the equal weight indexes instead of the likes of SH or PSQ that have the megacap stocks that are going parabolic?
AvatarElliott Gue
2:54
Yes, you can certainly short the equal-weight indexes as a way to play the current trends. I think the cleanest way, however, is via an ETF like RWM, which is the ProShares Short Russell 2000 Index. The Russell 2000 is a small/mid-cap Index and it's performign even worse than the EW S&P 500 and Nasdaq. Since the February 2nd close (peak breadth for the market), the S&P 500 EQual weight Index is down 8.5% vs. 11% for Russell Includign dividends. That's because the RTY is even more economically sensitive than the S&P 500 EW. I'm still retaining some exposure to PSQ/SH because history suggests that breadth this bad is unsustainable and the current mega-cap leaders will fall back to Earth and underperform to broader market as was the case in 2000.
Kerry T.
2:59
Hi Roger and Elliott:

I noticed New Fortress Energy (NFE) is way below your maximum
recommended entry of $35 - that makes it tempting to me unless it's headed down a lot more!!. Do you still like NFE? could you give some color commentary please?

regards
AvatarRoger Conrad
2:59
Hi Kerry. New Fortress has acquired a number of great assets in recent years. And we believe its dividend policy fits well with their ups and downs in performance-which is to pay a modest base rate supplemented with special payouts such as what investors received in January ($3 per share) and may be showing up in stock screens as a much higher regular dividend rate for NFE. The company had a generally solid Q1 business result that should support its aggressive plans for growth particularly in LNG infrastructure, including meaningfully higher EBITDA, revenue and adjusted earnings from both Q4 2022 and Q1 2022. And while interest expense was higher, operating expenses were not year-over-year. That said, our view is a recession is still likely and pretty much everything will go down if we get one. That makes us not in a big hurry to commit fresh money. And if you're interested in a high yield, there are better alternatives. But at half its price from November, NFE looks like it's headed a lot higher.
Matt
3:05
What would you say gives companies like PXD and EOG such an edge over others like FANG and DVN in your recommendations?
AvatarElliott Gue
3:05
We evaluate the producers based mainly on quantitative factors including free cash flow breakeven costs and likely free cash flow potential assuming modest commodity prices in-line with the current calendar strip price.  On top of the quantitative, we do layer in some qualitative factors like company-specific upside catalysts or underappreciated assets. In the case of the companies you mentioned, PXD is one of the lowest cost producers in the US with acreage in the core of the Permian Basin -- it's not the cheapest producer in our coverage universe by any means but we believe it deserves a premium valuation given its production cost profile and long-lived assets. EOG has low production costs and we also like their exposure to some very low cost natural gas plays; we don't believe the company is getting full credit for their potential due to the low cost of gas right now.  That said, we do like DVN and FANG generally; however, our analysis of their free cash flow potential doesn't rank quite as high as PXD/EOG
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