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5/30/23 Capitalist Times Live Chat

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Roger Conrad

4:39

The example of Westinghouse's AP1000 projects in the US makes that a question well worth asking. And there are still a lot of details we don't know about these projects, a big one being how much cost risk will the contractor absorb versus the investor? In the case of Vogtle and Summer, the contractor (Westinghouse/Toshiba) was totally on the hook--the investors Southern and SCANA were only at risk when Westinghouse filed bankruptcy.

What I can say is Brookfield Asset Management--parent of Brookfield Renewable (NYSE: BEP)--owes its success over the years to factoring out risk. And BEP has benefitted from that with extremely steady cash flow and dividends. As you point out, when they did this deal, Brookfield emphasized they would be focused on service contracts. I took that to mean they've farmed out financial risk of building, meaning the Polish government is carrying them-and that still appears to be the case based on what I've learned since. That could change of course.

Roger Conrad

4:40

Finishing with Brookfield, I don't see significant risk at this time from these projects to BEP shareholders.

Jack A

4:44

Hi Elliott:

In one of your publications you had recommended CF Industries, which produces fertilizer from natural gas.... It made sense because natural gas prices are low in the United States and fertilizer can be exported more easily than natural gas...... But the question is, why has the stock fallen so much from its high?....... You would think with food prices high in Europe, there would be a large demand for their fertilizer, and the cost of producing it would be low...

Thanks

Elliott Gue

4:44

Pretty much all commodity companies have been hit this year due primarily to concerns about the health of the global economy. On top of that, due to very high prices, many farmers held off on purchasing nitrogen fertilizer last year, which depressed volumes sold. The thing about nitrogen is that it needs to be applied annually or your yields -- especially for corn -- will get hit hard. K/P nutrients are more discretionary in terms of applications. So, I think this is a classic case of the market selling off CF due to macro concerns even though I believe the first half of this year will be the trough for their business. Ag. commodities are less discretionary than commodities like oil and gas as well and CF can still produce free cash flow even at current nitrogen prices.

Dan N

4:48

Hi Roger- a question to check in on MPW, since many of us still hold some shares. There's been no dividend cut yet, but the market is still punishing the shares. You've expressed general confidence in management. Are you still confident? Are the current challenges navigable?

I wouldn't want to try to 'call the bottom' for a business in as much flux as MPW and where short-sellers are still a major part of the story. But is MPW a good bet with a 3 to 6 year horizon? I would have thought yes, assuming the main risk is a dividend cut, not outright bankruptcy.

Thanks,

Roger Conrad

4:48

Hi Dan. I have expressed confidence in management for Medical Properties Trust (NYSE: MPW) and I continue to believe they're smart people. On the other hand, as I said when we recommended selling this REIT last year, it's also facing some very severe headwinds that if anything have worsened considerably since the beginning of the year. You're right it's heavily shorted--18.97% of float today according to Bloomberg Intelligence. And that means potential for a squeeze if MPW can weather current challenges. On the other hand, that short interest is so high because several key tenants are showing deteriorating ability to stay current on rent. And it's unclear what impact recapitalization or re-leasing would have on cash flow needed to pay dividends later this year, including the just concluded Prospect Medical recap. There are also a large number of shareholder lawsuits emerging, though that's less of a concern. Next earnings are expected August 18 along with the next dividend declaration.

Roger Conrad

4:50

Continuing with Medical Properties Trust--management may keep pulling rabbits out of the hat. My problem with recommending the stock now, though, is there are a lot of REITs out there now very cheap and without the risks owning this stock still presents. And $10.2 bil of debt (all due before the end of 2031) is now more than twice market capitalization, so yes there is potential bankruptcy risk in addition to elevated risk of a dividend cut.

Victor

4:54

Hi Elliott, we are seeing AI stocks taking off like a rocket. Perfect example NVDA. Are they immune to the current interest rates? Is this irrational exuberance all over again?

Elliott Gue

4:54

I think it's a classic bubble. If you look at NVDA, it's a fine company that's profitable and has market-leading technology in some segments. But it sells for close to 40 times revenues, which is tough to support even under the most rose-tinted cash flow and growth projections. It reminds me of names like Cisco and Sun Microsystems, which sold for 40 to 60 times revenues back in 2000 before collapsing. I think it's a bubble and a case of "Amara's Law" at work -- we have tendency to overestimate the impact of technology in the short-run and underestimate its impact longer term. If the US economy ultimately slips into recession as I expect and rates/inflation stay elevated for an extended period, history suggests AI stocks will be unlikely to maintain their altitude. Of course, it could continue for a while longer as it's tough to time the exact moment a bubble will pop. I was interested to see NVDA close near its intraday low today and below the opening price, printing a classic technical signal of price

Elliott Gue

4:54

exhaustion. We'll have to see if that holds and the stock starts to sell off in coming days.

Jimmy

5:04

HI Elliott, what is your take on SLB fundamentally after last quarters cash flow miss? How much further down can we go or do you think it is carving out a bottom here?

Elliott Gue

5:04

In my view, the theme for the services names in Q1 was "offshore and overseas." Stocks with strong international leverage have outperformed. SLB ticks that box, which is why I think it's outperformed its arch-rival, Halliburton, year-to-date by over 7 percentage points. That said, no stock will be totally immune to the macro environment, and that's why I think you've seen the entire group come in recently. From what I could tell the free cash flow miss was generally due to seasonal factors and management's commentary on international spending and growth remained bullish. In a broader market sell-off you could certainly see SLB fall a bit more, but I tend to think any dips to support in the low $40s would be buying opportunities.

Alex M

5:08

Hi Roger. Eversource Energy has pulled back to an attractive level, but there seems to be quite a bit of construction risk with multiple offshore wind farms in the works. I see they are working on selling their stake in one of the farms, but I'm wondering if you would view this company as a slightly riskier utility play compared to some of the other regulated operators like AEP, EVRG, and BKH. Thank you.

Roger Conrad

5:08

EverSource's (NYSE: ES) plan is to sell its ownership interests in the actual offshore wind facilities and to focus instead on building transmission infrastructure to service them. Its partner Orsted A/S is supportive of this plan and last week announced it would purchase the company's 50% interest in a currently committed lease area off the Massachusetts coast for $625 mil in cash. Orsted is also committed to completing the 3 projects it owns jointly with EverSource in various stages of development and is a global developer with deep pockets and extensive experience--and is a candidate for buying ES' interest in those projects as well. For disclosure, I've owned EverSource since it was Northeast Utilities and have done well with it. I consider it a buy all the way up to 90 and I believe the offshore wind sales significantly derisk operations. As for far as comparison with American Electric Power (NYSE: AEP), I think it's more on the same page with regulators as that company faces challenges in Texas

Roger Conrad

5:12

Continuing with AEP, I consider it a buy up to 90 nonetheless for its high yield and solid franchise. Evergy (NYSE: EVRG) is comparable in terms of risk and below its highest recommended entry point of 65. Black Hills Corp (NYSE: BKH) is a buy up to 70, though it does have the challenge of phasing out a coal mine and mine mouth coal plant or else a lot of regulatory risk. Another difference between EverSource and the other three is it does not have generation assets but is rather a pure transmission and distribution company--which eliminates some risk.

Dan N.

5:18

Hi Roger- Any rumblings about strategic review for AY? AQN selling its stake to a new sponsor? I see headlines that activist investors now have stakes in AQN and are pushing hard for follow-through on planned asset sales.

As fun speculation, who do you think would make a good or likely acquirer for a 44% stake in AY? I see Brookfield named periodically (including for an outright full acquisition of AY), but what about AES? I could see AES-AY being a far more synergistic pairing than AQN-AY turned out to be.

Thanks,

Roger Conrad

5:18

Atlantica Yield has yet to report anything concrete from its ongoing strategic review. And management was pretty circumspect about the proceedings during the Q1 earnings call. Next earnings are August 3. I think the most likely outcome is a few tweaks that will enable dividend growth to restart. But the biggest potential move really is what Algonquin (NYSE: AQN) decides to do with its 42.15% ownership interest, which is worth about $1.2 bil at AY's currently depressed price. My view is we could win from either a partial sale that moves sponsorship to a parent more committed to the model or a full sale. It's certainly possible that could be an operating company like Brookfield or even AES Corp (NYSE: AES), which as you point out has global operations including transmission. But the buyer could also be private capital, as was the case with the former Pattern Energy. Either way, I think it's worth sticking in AY shares for, despite the recent selloff.

Guest

5:24

Just about every Utility is guiding to 4-6% EPS growth through 2026-27. It doesn't seem to matter what the regulatory environment is for the utility, the power generation mix, customer mix or the type of utility. This would imply a 8-10% annualized return for the RYU.. why not just buy that.

Roger Conrad

5:24

I would say the main reason I prefer buying individual stocks to any ETF--including Invesco S&P 500 Equal Weight Utilities--is you can focus on what you want to own, rather than what the ETF sponsors require you to, and that should make for better performance. Several utilities, for example, are guiding to 6-8% earnings growth through 2027--and I'd certainly rather own them at the right price than companies guiding to 4-6%. Second, this ETF is only yielding around 2%, which is less than half the average of CUI Portfolio utilities. And it's been highly variable as well, paying just 59 cents a share in March versus 79 cents last September.

Guest

5:29

Hi Roger: VZ continues to drop. Now at $34.75/share or 7.5% yield. Is the whole telecom industry in an unfavorable position with investors? or is VZ having problems? You mentioned TMUS in a prior email to me. Why is that so popular? Do you still prefer VZ over T? Thanks for your and Elliott's advice over these many years! Best, Barry

Roger Conrad

5:29

it's been a slow bleed for Verizon Communications for sure. And it's a good example of how stocks that are already cheap can always get cheaper before they recover. As I've noted earlier in the chat, I do think Verizon will recover so long as it sticks to its industry leading network CAPEX plans and is able to maintain dividend and balance sheet strength. And I saw plenty of signs of that in Q1 results. T-Mobile US is more popular in my view because it's buying back stock with free cash flow and is gaining customers faster than VZ or AT&T (NYSE: T). I think the better way to own it is with now majority owner Deutsche Telekom (OTC: DTEGY) as I've noted in CUI. I do think Verizon has more consistently invested in network than AT&T over the years, which has broadly diversified. And while AT&T is now a pure play more or less, I still prefer VZ. Looks like I need to do a telecom piece in CUI!

Guest

5:31

What's your thoughts on DVN

Roger Conrad

5:31

We currently rate Devon Energy (NYSE: DVN) a buy at 40 or lower, and it's a bit above that at this point. The main concern would be the variable portion of the dividend, which is likely to come lower this summer based on the trajectory of energy prices. But it one we're looking at.

Sandy W.

5:41

Hi Roger,

I am happy for this oppotunity to get updated on the changes in interest rates and the transition to the "third leg down."

Since starting the CUI+ program I now have all your recommendations except ABBV. I also am following the reit sheet and have purchased some of those, which confounds the rebalancing of the portfolios, because I dont understand how the % is determined. I still have long positions in CVX and XOM with significant gains. Since the Schwab money market fund has a higher payout than the stocks, is this the time to sell the rest of these two energy stocks? Thanks again for your wisdom.

Roger Conrad

5:41

Hi Sandy. Thanks for your question, which I see you also emailed to me. I think of anything in the energy sector, you can feel comfortable holding super majors like Chevron Corp (NYSE: CVX) and ExxonMobil (NYSE: XOM). Either could still dip a bit from here and in fact they still trade above what I would consider maximum entry points despite coming off their highs. But these companies used their free cash flow windfall of the past year wisely, paying down debt, buying back stock, making targeted acquisitions and solid but not excessive dividend increases. So as a result, they're well prepared for a recession near term and in fact will certainly use it to get even stronger for when the energy upcycle resumes. As you know, I am recommending a much larger than normal cash reserve. The CUI Plus model is based on a $100,000 initial investment. But the important thing about allocations is the percentages rather than the amounts. These are shown in the "Weight" column of the portfolio table.

Roger Conrad

5:44

Finishing Sandy's question, no matter how closely you follow the stocks in the portfolio--and even Abbvie is finally coming down to my highest recommended entry point--the important thing is to hold a fair amount of cash. I'm right now at almost a third of the portfolio, which I'm comfortable with in view of the direction of the market and the 5% plus yield. But the point is just to have a good amount of cash, with the idea of deploying it after the ongoing downleg has run its course. Hope this helps. If not, feel free to write me again directly at rsconrad2013@gmail.com.

Jack A.

5:52

Hi Elliot:

I've been very disappointed at the price performance of KMI......... I recently saw a survey of energy analysts, and it was reported that only 26 percent have a positive rating on KMI, and it was the second lowest - only Cottera had a lower rating....

What's behind this?......... Is it because they have too much debt that needs to be refinanced at a higher rate?..... Is it related to the fall in natural gas prices?..... ET is very involved in pipelines for natural gas, but seems to be doing better..... Is there any hope for KMI in the near future?

Thanks

Roger Conrad

5:52

According to Bloomberg Intelligence, 6 of the analysts they track rate Kinder Morgan Inc (NYSE: KMI) a buy versus 15 holds and 2 sells. That's decidedly neutral.

I don't think the reason is balance sheet--the company is universally rated mid-BBB with a stable outlook. Neither is there much variable rate debt exposure anymore, now that management basically closed it out at a cost of flat 2023 distributable cash flow. I think the reason is really earnings either, after the company actually raised 2023 guidance following Q1 results.

It may be slower distribution growth than closest peer Enterprise Products Partners (NYSE: EPD), which is now raising 5% plus a year versus Kinder's 2%. And KMI's retreat has brought its yield closer to EPD's, though it will likely remain at a premium because it's not an MLP. But I think the real reason for the decline here is the same selloff that's affected other dividend paying stocks: KMI's -7.5% decline this year is on par with the iShares Select Dividend ETF.

Roger Conrad

5:55

Staying with Kinder, I do think there's a great deal of reason to believe we'll see not just a recovery but big returns the next few years. Midstream is always last to the party in an energy upcycle. And so long as Kinder keeps growing as indicated in guidance, it will continue to grow its business, possibly with an acquisition. I'm also unhappy with performance year to date. But I'm still convinced this is a value situation I want to own.

Fred W.

6:00

Hi Roger and Elliot,
Just wanted to get you opinion regarding the latest market status and what trading opportunities you believe may present themselves if we get to the brink of a default over the next few days?

Also, what do you think about short term trading opportunities in the following energy related stocks:XOM,VLO & PXD, and commodity plays like BHP,VALE & RIO?

Thanks for your insight, should be an interesting few days. My portfolio is heavily weighted towards energy for the longer term, but hoping to be able to grab some good bargains during the upcoming turmoil.

I really appreciate both of you for your great insight into the Energy sector during the many years that I have been a subscriber.

Roger Conrad

6:00

Hi Fred. If the US government actually defaults in early June, I don't think a lot of stocks are going to do well. That includes the AI stocks that are still leading the S&P 500 higher even while most stocks are sliding. if the oil and commodity stocks you've listed should decline meaningfully from here in a temporary default, I think it would be a great opportunity to pick them up--not as a trade but as a long-term bet on higher inflation.

At this point, our sources on Capitol Hill are viewing approval of this deal as far more likely than rejection, given the stakes and initial comments so far from Congressmen. But being politicians, that's certainly not a given. We think that's another good reason to hold cash now--the other being we're headed for recession anyway.

Richard L.

6:05

Roger,
Thanks for the monthly chats. My question this month concerns the dividend safety of D, T and VZ. All three seem awfully high, do you consider them safe? Thanks again for keeping us informed. Richard
P.S. I am finally resting easy on SO.

Roger Conrad

6:05

Hi Richard. All three posted Q1 results that strongly backed the integrity of these companies' balance sheets and ability to pay dividends. And all three have a record of weathering recessions with dividends intact. Of the three, Dominion is undergoing a strategic review with results to be announced this summer. That means it's likely carrying the most dividend risk, though management seemed to rule out a cut during the Q1 earnings call following the Virginia regulation deal. AT&T and Verizon will face a test on whether they can meet free cash flow guidance this year. But they did in Q1, and gave every assurance they will the rest of the year. And so long as that's the case, there's plenty of money to cut debt and maintain or even increase the dividends--Verizon as soon as September. I would agree all three are pricing in a lot of dividend risk. But at this point, that's also upside if they avoid cuts. Agreed on Southern Company--a long way to the finish line with Vogtle. But with Unit 3 operating

Roger Conrad

6:06

continuing with Southern Company--and Unit 4 on track, the big costs are behind the company, while the big savings are ahead. And what a lot of people forget is they've been recovering the construction costs as incurred. The last rate proceeding after the startup is a relatively minor affair.

Jim D

6:07

Elliott & Roger BTW - I appreciate your intelligent professional no-hype-zone approaches to your work. You normally give both sides of the story while proving a more likely scenario.

Roger Conrad

6:07

Thank you Jim. We appreciate it. We're certainly not always right but it's always our objective.

Guest

6:11

Hi Roger and Elliott: AY is now trading below your Dream Price of $25/share and yielding 7.25%. Is this company a "best in class" like NEP? Is it a renewable like BEP and NEP? How does it compare in strength and size and "favor" to NEP and BEP among investors? My reason for asking is to decide if I should diversify my future investing to AY from BEP and NEP. I do not know of any renewable company that has the growth and dividend record of NEP, right?Thanks. Barry

6:17

Dear Roger: Can you explain again the rationale for buying AGNU? While it pays an incredible dividend of $3.88/share or about 13.25%, what happens after its preferred shares convert to regular AGN shares? Then we are stuck with all of these common shares in a company which hopefully will return to favor with investors, right? I guess you must feel comfortable recommending the preferred shares now in a company whose common shares have previously been beat up. Please explain. Thanks! Best, Barry

Roger Conrad

6:17

Hi Barry. That's pretty much the rationale. I believe Algonquin has a solid business model built on high quality utility and renewable energy assets. The company was caught out trying to buy Kentucky Power from American Electric Power at a time when the cost of carrying variable rate debt to finance a deal was doubling and trebling. And as a result, it's had to make some pretty big adjustments to get back on track. AQNU is a bet the company will show meaningful progress in the next 12 months or so, which will raise its conversion value in addition to the high yield. My intent now is to hold through the conversion, at which time we'll get lower yielding AQN common shares but that are well on way to bouncing back.The Q2 earnings call in mid-August ill be a test as the company announces "go forward" plans then. Assuming I like what I hear, I'll stick with this recommendation.

Arnold S

6:21

Regarding Energy Transfer ET... It has been reported on the NASDAQ website that company insiders have purchased 17,868,790 shares in the last 12 months. Does this make the stock more attractive in your view?

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