JotCast | 5/30/23 Capitalist Times Live Chat

Return to

5/30/23 Capitalist Times Live Chat

powered by

Prev Page View Full Chat Next Page

Elliott Gue

3:05

at this time. We did a more detailed rundown of out top oil plays -- including new addition HES -- in the April issue. We're doing a more detailed valuation of out favorite natural gas picks in the issue due out over the next day or two.

Joe N.

3:08

Please let us know why Utility stocks are plunging.

Roger Conrad

3:08

Hi Joe. First off, the Dow Jones Utility Average is only off -6% so far in 2023, so what we're really talking about here is underperformance to the S&P 500 (up 10.4%), thanks to a big run-up in a handful of big stocks hyped up for potential in artificial intelligence. As I noted earlier in the chat, utilities' Q1 results and guidance were quite solid--and I've highlighted about 90% of them in the current Utility Report Card. That indicates very strongly they would weather a recession well, just as the sector has traditionally. And I'm very comfortable holding all of our favorites at this time.

The underperformance we're seeing now is reflected even more starkly in the broader dividend paying stock universe. For example, the iShares Select Dividend ETF used as a performance gauge for dividend paying stocks has lost nearly 10% of its value so far in 2023 and continues to slip. Even the MLP Index is underwater before dividends. And financials are much worse.

Roger Conrad

3:12

Continuing on Joe's question, there are a number of reasons for the underperformance of dividend paying stocks to the S&P 500--which is also reflected in most "growth" stocks including natural resources that have been strong. But the most important in my view is the market is adjusting valuations lower for pretty much every sector other than AI-related stocks in anticipation of a recession. That could go on for a while, which is why we're not so quick to deploy the cash we've built up in model portfolios CT-wide, But we are certainly comfortable with the fundamentals of the companies we're been recommending. And there will come a time when we will want to get a lot more aggressive.

Hans

3:16

Roger, What is happening to D, how low can it go!

Roger Conrad

3:16

Hi Hans. Basically, Dominion Energy (NYSE: D) is being caught up in the same selling wave that's engulfed almost everything in the stock market--with the notable exception of stocks deemed to have some connection to the anticipated growth of artificial intelligence. Some of the beneficiaries are kind of a stretch, while the omission of others like the big telecoms doesn't make a whole of lot of sense from a business standpoint. And arguably, power utilities should have an angle as well, since deployment anything close to what NVIDIA and others are touting would require a massive amount of new electricity supply. But utilities are clearly not being considered by most investors in that light now. And with recession fears heating up, we think the selling could last a while longer.

Dominion is also undergoing a strategic review likely to result in meaningful asset sales, including very likely a portion of its offshore wind facility now under construction with 90% of costs locked in. I believe those developments

Arnold S

3:18

I'm sure this is going to be asked many times today, but I have a question about Chevron buying PDCE. The offer price seems very low to me especially when I look at a price chart of PDCE. Do you think that another suitor could come along and push the price up?

Elliott Gue

3:18

Nothing is impossible, but I think Chevron is the most logical buyer of PDCE. The problem for PDCE is that in the DJ Basin is only has 800 or 900 of its first-tier drilling oil sites with the best economics, which is just 4 or 5 years of inventory at the recent drilling pace. It also has additional sites in Colorado that are probably profitable, but have inferior economics to the company's top-tied sites. Then, it has a smaller position in the Delaware Basin of the Permian. In other words, the market has felt PDCE has insufficient drilling inventory and scale, which is why the stocks has underperformed lately. Also not helping is the perceived regulatory risk in Colorado. CVX is the other big player in the DJ Basin with significant experience and therefore, PDCE is a logical fit. CVX can cut costs and slow down drilling activity, generating enough free cash flow to make this purchase price reasonable. I just don't think PDCE would be worth as much to any other buyer.

Roger Conrad

3:20

Continuing with Hans on Dominion--the developments should prove very bullish for the company long-term, particularly now that it has a new deal on regulation in Virginia that will help it respond more effectively to inflation pressure. But the uncertainty of the strategic review is a cloud hanging over Dominion, making it riskier than other utilities in the short-term in the eyes of many investors. That means when there's pressure on utilities, there is likely to be more on Dominion's price. So while I think the stock is at a great entry point and should be trading in the low 60s at least in the next couple years, it could well go even lower near-term.

Jim N

3:22

Elliot, A few months ago you recommended Cullen Frost Bankers (CFR). Since then, the price has been lower. Should I sell it? I know banks are not popular now.

Elliott Gue

3:22

Longer-term I believe CFR is one of the best regionals in the US. It's also conservatively run and, unlike most regionals, has simply carried a significant portion of its assets as reserves at the Fed. That said, I have concerns about additional pressure on the group as a whole amid deposit flight and ahead of a likely US recession. CFR is not likely to be able to buck the trend of weakness in the group as a whole. Therefore, I recommended selling CFR back in March when it bounced (temporarily) over $110. It's a name I will look to revisit later this year or in early 2024 once we get some signs the sector is stabilizing. But for now I've recommended selling and standing aside.

Alan R.

3:26

Guys,

Several oil companies have announced in the past month or so that they are going to focus on increasing dividends as opposed to spending on capex or share buybacks (OXY for example). To me this seems to be very positive; what are your thoughts? Thanks

Roger Conrad

3:26

Hi Alan. Yes, this has pretty much been the approach for oil and gas producers since commodity prices started recovering from the 2020 pandemic lows and what we believe is a long-term energy upcycle began. We've seen it in the large number of companies paying a portion of dividends at a variable rate, as well as buybacks. And the strategy coupled with aggressively using free cash flow to cut debt has really bullet-proofed the best in class from a recession--their CAPEX plans, balance sheets and the base level of their dividends as well.

As we've pointed out in Energy and Income Advisor, this has NOT been producers' behavior in previous cycles. We think the reluctance to ramp up CAPEX is due in part to concern about another recession's impact on prices and the widespread (and accurate) view last year that price spikes due to Russia's invasion of Ukraine would be temporary. But it's also because of growing regulation and hostility in the capital market to fossil fuel investment.

Roger Conrad

3:28

Finishing up with Alan's question, we believe the lack of CAPEX pretty much guarantees this energy upcycle will last longer and be more pronounced than anything we've seen since at least the 1970s. Mainly, when the Fed stops raising rates, demand will return higher. And the lack of investment ensures supply won't be adequate to meet it without pushing prices higher again--which as you say is very bullish for our favored producers.

Cliff W.

3:34

Dear Mr. Conrad,

thoughts on ETRN big move today on news MVP back on track?

Roger Conrad

3:34

If the Mountain Valley permitting provisions do make it into the final deal on raising the federal debt ceiling, it will be very bullish for Equitrans Midstream (NYSE: ETRN) the lead developer. The big risk for the company has been it would have to walk away from the project after finishing 94% of it--taking a huge writeoff and possibly having to restructure its $7.6 billion in debt--which even after today's upward spike in the stock is still more than twice market capitalization.

Expedited permitting likely takes this risk off the table. I don't think it necessarily means the dividend is out of the woods, as delays we've already seen continue to raise costs. And though MVP is likely to be fully subscribed, there's still the possibility of a big writeoff when it finally enters service. I'm going to keep ETRN on the Endangered Dividends List and I think there are better places to invest in midstream. But this is good news for Virginia consumers. Another beneficiary--30% owner NextEra Energy.

John C.

3:41

Hello
A couple questions for the upcoming chat:

1) please discuss REITs areas of opportunity and what to avoid...how to evaluate.

2) natural gas ...a good time to invest...recommendations?

Thanks

Roger Conrad

3:41

Hi John. Before the chat, I was putting the finishing touches on the May issue of The REIT Sheet. That should be posted tomorrow morning at the latest. I think there are many opportunities in the sector now, with best in class REITs in multiple property types trading as though a recession would crush them, despite just posting strong Q1 results and guidance, increasing dividends and being far better positioned for a downturn than they were before the 2020 pandemic recession. I think we need to go easy committing fresh money to new positions in the stock market now, including top REITs. But it is a good time to take at least partial positions in several.

Natural gas is a major theme in part 2 of the Energy and Income Advisor issue that should be out tomorrow. Same caveats apply regarding likely downside in the overall stock market. But we are starting to see some great entry points here as well.

Alex M

3:47

Are you seeing any opportunities in the financial space with the recent dislocation in regional bank stocks? Thoughts on bank preferreds? Thank you.

Roger Conrad

3:47

Hi Alex. That's a really good question. Regional banks especially are a corner of the stock market that just continues to get hammered. Part of the reason is economic--recessions bring on higher credit risk and with money market fund rates north of 5%, it's tough for them to hold let along attract new deposits, even with the Federal Reserve's bailout of SVB largely taking bank run risk off the table even for large deposit accounts. That's enough of a headwind to keep the pressure on these stocks. But there's also the growing risk the regionals will effectively be regulated out of existence by federal policies intended to protect consumers that instead drive business to the biggest banks. It's the same dynamic that ended the savings and loans 30 years ago and is driving out small to medium sized investment firms.

I have recommended Arrow Financial (NSDQ: AROW)--a small upstate New York community bank--in CUI Plus/CT Income. But recently I sold more than half the position from the model, leaving only a rump.

Roger Conrad

3:50

Continuing on Arrow, the bank is facing an oversight issue. Despite paying its regular dividend on time, it has not been able to file its Form 10-K for 2022 or its 10-Q for Q1 2023. The new CFO is basically cleaning house, with the CEO stepping down earlier this month. And in my view, the bank as basically a place for local deposits and loans is still solid. But until there's more clarity, I'm not inclined to hold more than a rump position in the stock. And the same goes for regionals in general at this time.

Dan N.

3:58

Hi Roger-

1) how disruptive have the Huawei restrictions been to US carriers and telecom infrastructure companies like Crown Castle? ‘Rip and replace’ expenses.

https://www.nytimes.com/2023/05/09/technology/cellular-china-us-zte-hu...
‘Rip and Replace’: The Tech Cold War Is Upending Wireless Carriers

2) also, I read a few analyst reports criticizing the big 3 US wireless carriers as suffering from aggressively pursuing customers/subscribers at the expense of profitability. Would this be an argument to invest instead in telecom infrastructure cos like Crown Castle as a better way to play telecom w/o worrying how the customer-facing carriers fare in the marketing battles?

Thanks

Roger Conrad

3:58

Hi Dan. I fear the Huawei restrictions may have left the US, Canada and Europe several years behind China in terms of deployment and development of what 5G is capable of. The 5G peddled by T-Mobile US, for example, is basically glorified 4G in my view. And Verizon's efforts to build an advanced network and populate it are still a work in progress.

Profitability at the Big 3 US wireless carriers has definitely suffered from aggressive pursuit of customers. T-Mobile has maintained support on Wall Street because of aggressive stock buybacks--though the purpose of these was clearly to restore parent Deutsche Telekom to majority ownership with minimal cash outlay.

My view is we're seeing the final death throes for US wireless carriers outside the Big 3. And once that happens, carriers may focus more on earnings. And at just 7.5X earnings yielding 7.5%, it's hard for me not to like Verizon long-term. But after being expensive a long time, Crown Castle (NYSE: CCI) is looking interesting.

Roger Conrad

4:01

Continuing with Dan, I like CCI with its 5.6% yield and its very strong franchise. I'm a little less enthused for conservative investors by its rival American Tower Corp (NYSE: AMT)--which is now heavily exposed to overseas markets/regulation/currency, as well as data center investment that appears to be dragging down cash flow. But it's also trading $100 less than its 52-week high. And sooner or later, these best in class telecom survivors are going to reward our patience with a big turnaround--in addition to the high yields they're paying now.

Arthur

4:06

Gentlemen,
As always, thank you for hosting these web events.
1)     Current thoughts on HASI? How do you assess the recent share offering at $23? Is there a new Dream price?
2)    AES vs. AESC. What are the benefits of one over the other? Am I wrong to look at it like the Center Point preferred play from a year or two ago?  I’ve been nibbling at AESC, but I am not sure at which point I’d be better off sticking with AES over AESC. Given the yield disparity and the fact that their prices seem to move in tandem, and the maturity date in early 2024, why not AESC?
3)    Elliot, good luck with your launch of FMS.  Will it be duplicative of the Capitalist Times current offerings, and are you just trying to reach a new audience? If not, how is the focus different from what you guys are currently doing? I believe I now subscribe to most or all the services and have been delighted with the advice offered and the value given. Definitely interested; I just want to understand a bit more about what the goal is.

Thanks

Elliott Gue

4:07

I'll answer number 3 and I think Parts 1 and 2 are for Roger. To date, I have been publishing free content on Substack under the Free Market Speculator and Roger also has a Substack called "Dividends with Roger Conrad." I publish free content every Tuesday and Thursday mornings at 10 AM. What I generally don't do is give out specific stock and ETF ideas in the free Substack -- sometimes I'll mention a stock, but it's more focused on broader economic/market commentary. So, I've had quite a few requests from Substack readers for a model portfolio with more recommendations and many aren't existing readers of other other publications at CT. To start The Free Market Speculator model portfolio will be the Creating Wealth model portfolio I manage for the CT services. Over time, I may look to add more features to Substack depending on feedback I get from readers there. So, basically it's a distinct audience to our CT publications and I'm launching he paid tier in response to reader requests.

Jim T

4:09

Roger, Thanks for tyhe chats. Need your current assessmenbt of AGNU for an investor with a 2 Plus year outlook.

Roger Conrad

4:09

Hi Jim, I'm not seeing anything trading under the symbol "AGNU." Can you clarify what that is? If you mean Algonquin Power & Utilities' 7.75% preferred stock of 6/15/2024 my advice for those without positions to buy at 30 or less. It's trading slightly below that level now ahead of a regular quarterly dividend of 96.875 cents per share to be paid to shareholders of record June 1. AQNU will convert into shares of Algonquin (NYSE: AQN) on June 15, 2024. The exact amount of the exchange will depend on Algonquin common stock price on that date. At this point, the conversion value rises by $3.333 for every $1 increase in AQN. And I see considerable upside in addition to the dividend as the company executes its strategy of asset sales to cut debt.

Guest

4:15

In light of the Mountain Valley Pipeline securing permit approvals in the debt ceiling package, would you now favor Marcellus gas plays over Haynesville? I know that Elliott previously prefered Haynesville plays due to proximity to the Gulf Coast and industrial plants.

Elliott Gue

4:15

Marcellus producers have the lowest cash costs and can generate free cash flow even in that $2.50 range or below. So, they're going to tend to perform well when prices are depressed like right now. Haynesville sits a bit higher up the cost curve in the $3.25+ range for natgas. However, Haynesville producers generally see higher realizations because of lower transport costs and the ability to sell directly to Gulf Coast/Henry Hub markets. MVP would reduce Marcellus discounts but probably not eliminate them. And Haynesville has higher production growth prospects to serve LNG terminals in a 3.50 to $4+ gas environment. So, I think it makes sense to have both -- right now we have recommended Chesapeake (which is basically a Marcellus and Haynesville producer) and we're planning to add a Marcellus-focused name to the portfolio in the upcoming issue out this week.

Robert

4:16

If / when MP is absorbed by OKE, are there possibly 3 LPs to consider in replacing MMP (within the next 3 to 6 months) ?

Roger Conrad

4:16

Hi Robert. I'm leaning heavily at this point to just staying with the new OKE/MMP--if and when the merger closes of course. The new company will be much more diversified geographically and operationally than either as a standalone. And as the fourth largest US midstream, it will have better access to capital and more leverage with vendors, and therefore the ability to add even more scale advantages. They've also promised to accelerate dividend growth, which has been low single digit percentages for both at best recently. The risk to the deal is the Justice Department--which in the Biden Administration has become extremely merger skeptic. But at this point, there seems to be few grounds to reject it. As for new MLPs, we've been focusing on the best of the biggest for a while and that's where I think we should remain at this stage of the cycle. Midstream is always last to participate in an energy upcycle and with best in class still cheap there will be plenty of opportunity to dip into lower quality names.

Guest

4:22

I hold NEE, NGG, SO & SRE in a broadly diversified many holdings portfolio from AAPL & CVS through RTX & XOM. thinking of trimming my 4 gas & electric utilities. Which 1 makes the most sense to trim as source of funds for further diversification?

Roger Conrad

4:22

Thanks for that question. The temptation is always to sell underperforming sectors--and as discussed earlier in the chat, basically anything paying dividends now is underperforming the AI-driven names that dominate the S&P 500 including Apple, which in our view is one of the worst values at this point and therefore very vulnerable. If I have to pick one of those four names, I probably have the most concern about National Grid--despite some great numbers and a big dividend increase, it's very much at risk to a Labour Party victory in upcoming UK elections. And its relations with New York regulators could also be better. But bottom line is selling gas and electric utilities after they've already dropped and ahead of a recession in which they'll outperform other sectors as businesses isn't something I'd recommend now. In fact, the smarter move would be to take a little off the table in the AI names--which again have run way up.

John K.

4:30

At this time with high inflation, is it better to be in high-yield dividend stocks or growth? Thanks!

Roger Conrad

4:30

Hi John. What we're really looking for is high dividend stocks that also offer growth. The best in class midstream energy companies we recommend in Energy and Income Advisor are good examples--Energy Transfer LP (NYSE: ET) for example yields almost 10% and will be raising dividends 3-5% a year going forward--and probably faster than that as the energy upcycle unfolds. Energy and resource producers that pay variable rate dividends are another option. And I like the utilities that have consistently affirmed upper single digit percentage growth rates, based on highly visible investment plans.

Bottom line is it you can have both if you buy individual high quality stocks when they're cheap--and a recession should give us an even better opportunity for shopping.

BKNC

4:37

Gold has dropped off a little bit (5%) but why is Newmont mining down so much? The Newcrest Mining purchase has not occurred yet, so I do not understand the price drop since they matched guidance. This holding is down 30% which is way more than other gold miners. The recession concerns affect all gold miners. I am questioning if this is the best company to be in for gold mining? Should we move on to something with better prospects?

Elliott Gue

4:37

If we look at NEM performance this year is was slightly above the mean and median in terms of total return through February 3rd; since then it has underperformed, falling 18.2% vs. Philly Gold & Silver at -4.9%. The first proposal from NEM for NCM was February 5th, so that's pretty strong evidence the stock's recent underperformance is related to the since upwardly revised offer to buy NCM. More broadly I think there are two concerns at work: 1. The market is still hostile to any signs of capital inefficiency or spending money as most investors are focused solely on free cash flow in the mining industry. 2. Rising production costs due to industry-wide inflation. In my view, the NCM deal will create value in the intermediate term and makes sense with gold at $1,800+ over the next several years. So I think concerns that NEM overpaid for NCM are illogical unless you think gold is headed back to last years lows

Elliott Gue

4:37

(I don't.). While there is cost inflation, I suspect the rise in average gold prices will be enough to preserve margins and NEM's strategy of replacing high-cost production with lower cost output from newer, cheaper-to-produce mines is a good one. So, I still like NEM and I'd also mention WPM as a stock worth a look. It's a streaming company, which means it doesn't have direct exposure to rising mining costs. The streaming and royalty companies have been outperforming in recent quarters mainly for that reason. Also WPM has an outstanding production growth profile as its mining partners start-up new mine expansions over the next few years.

Dan N.

4:39

Hi Roger,

Westinghouse, Bechtel to advance first nuclear power project in Poland

https://www.nsenergybusiness.com/news/westinghouse-bechtel-polish-nucl...

as a longtime, happy holder of BEP, I’m both fascinated and worried about the Westinghouse acquisition. It was announced with emphasis on the reliable cash flow from service contracts for existing nuclear plants, very low risk.

Now there are announcements about several more AP1000 plants to construct… and we’ve been tracking those as boondoggles for how many years? Reason to worry?

Thanks,

Connecting…

Your current subscriptions

None

Register now to continue managing your subscriptions

E-mail Address	Chat Owner	Status	Remove

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