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6/27/24 Capitalist Times Live Chat

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Sohel

3:11

Hi Elliot, From a seasonal perspective, what is the best time of year to buy stocks like CHK?

Elliott Gue

3:11

I don't think there's a consistent seasonal bias in energy stocks.

I've done seasonal studies for both oil and natgas and the best months for these commodities tends to shift around from cycle to cycle.

I generally use seasonal signals mainly on a short-term (trading) basis. For example, when gas prices are weak in spring -- a period of weak demand -- that often precedes some strengthening in summer as summer cooling season kicks off. Oil often sees a sell-off in November/December and when it does it can often rally off those lows into the New Year. I only ever use these signals in combination with other factors.

Sohel

3:11

Hi Roger, In your portfolios you have a buy under price .. once a stock is well above that is that an automatic indication to reduce?

Roger Conrad

3:11

Not necessarily, but we definitely don't advise adding to positions or establishing new ones at levels above those "highest recommended entry" prices.

In Conrad's Utility Investor, I have a regular table in the Portfolio section that lists companies trading above those "buy below" levels. The far right hand column shows a price at which I'd recommend taking at least some money off the table. And we've been able to do that on multiple occasions in recent years, buying back later at lower prices. Right now, Constellation and Vistra are above those points and that's been the advice. I have a similar price point for stocks in the REIT Sheet Recommended List. And I provide that advice in CUI Plus as well.

As for EIA, we have taken profits in several stocks since the energy upcycle began, but that's been on an individual position basis.

Victor

3:15

Hello Elliott, COP was on the actively managed portfolio as hold for a period of time and then it was removed. Was it removed because it was a “sell”? Do you still feel that way?
Thanks.

Elliott Gue

3:15

We recommended selling it because we felt there were better opportunities in other names and we wanted to free up some capital in the model portfolio for new recommendations. Fundamentally we like COP, but I still think there are better names to buy here. Periodically I go through the model portfolio and ask myself whether I want to recommend buying more of a particular recommendation; if the answer is "no" or lukewarm, that's a name I'd think about selling out in favor of better prospects.

Victor

3:17

Hello Roger, In November of last year NEP started on a solid uptrend but it looks like that’s over. On the other hand the expectation on increased power consumption is high due to AI. Is NEP well positioned for this additional demand of power? Thanks.

Roger Conrad

3:17

NextEra Energy Partners is a funding vehicle for its parent NextEra Energy, which holds a roughly 55% economic interest. NEP's assets are ownership interests in long-term contracted power plants operated by its parent's unregulated unit. And it's fate is squarely tied to the health of its parent, as well as NextEra Energy's willingness to support it when capital markets are unfavorable as they are now.

To the extent NextEra Energy is positioned to capitalize on incremental electricity demand from artificial intelligence-enabled data centers, NextEra Energy Partners is potentially as well. And I do think that's considerable--solar, wind and energy storage projects can be sited, permitted, funded and built by the company in 12-18 months. That means highly predictable costs as well as ability to match demand that's rising in real time now. And the long-term contracted model is exceptionally secure in any economic environment.

That said, NEP is going to move on prospects to resume drop downs from NEE, not AI.

Sohel

3:23

Hi Roger, Between the large foreign majors like TTE, SHEL, BP ... do you suggest we get any of them? How do you rate them vs US majors say XOM for example.

Roger Conrad

3:23

I think the biggest difference between the global super majors is the extent they're focusing new investment on oil and gas, versus renewable energy and renewable fuels. Chevron and ExxonMobil (the American companies) have stayed focused on oil and gas, and as a result they're now in better position to take advantage of the growing scarcity than the European giants. That includes BP and Shell, though both are now retreating from plans to reduce output over the next decade.

I think TotalEnergies offers an interesting middle ground. The company is ramping up output especially in Africa, in part to replace its now exited projects in Russia. But it's also been building a low cost portfolio of low carbon fuels and renewable energy generation. The latter in particular provide countercyclical cash flow--meaning earnings hold up better when oil and gas prices dip. And that in turn enables investment to keep progressing and dividends rising. I have it in CUI Plus as a buy up to USD70.

Victor

3:31

On your most recent EIA report you wrote: “Higher Energy Prices Mean Fatter Dividends, Lower Prices Slim Pickings”. Oil prices have gone up and this should improve the dividends payout of the stocks you listed on the report. But you highlighted DVN as a laggard. Could you please expand on that? For instance FANG has been moving higher when compared with DVN.

Roger Conrad

3:31

To clarify, that's an article about oil and producers that pay variable rate dividends. We've been alternately bullish and bearish on the group depending on our near-term outlook for oil and gas prices. In early 2023, the view was cautious. Now it's considerably more bullish, as we believe gas in particular is due a rebound and variable rates have likely reached a bottom for the vast majority of companies.

I called Devon a laggard in the group because in May they declared a dividend of just 35 cents for payment June 28. That's the lowest level in three years (the March payment was 44 cents). The company has since reported some encouraging operational developments, including a boost in its output target combined with a 10% cut in CAPEX. That's a good sign a higher dividend is on the way. But the dividend cut has definitely hurt the stock, which has underperformed this year. Diamondback in contrast paid a dividend in May more than twice the year earlier level.

Sohel

3:36

Hi Elliot, What are your thoughts on small stocks? They have been lagging for quite a while and I hear due for a reversal when interest rates start to fall. My concern is that if there is a recession, small cap stocks would suffer more than large cap. What are your thoughts? Is there an ETF you like, where one could start to build a position?

Elliott Gue

3:36

Small cap stocks have really disappointed. We recommended buying into the seasonal rally late in 2023 via a couple of ETFs in my Creating Wealth Advisory (IWM and VBR) and that worked, but they just stalled early this year.

I recommended selling IWM for a profit some time back (January/February I believe). We still hold VBR, which is an ETF that buys small caps with strong free Cash flow generation and profitability characteristics. I like VBR over IWM because the broader Russell has so many money-losing names in it that I think could be vulnerable. VBR has outperformed IWM by around +4%, but it's still lagging the S&P 500. I am more likely to recommend selling VBR from the model portfolio than adding more to it.

Elliott Gue

3:36

I can find no reliable connection between the interest rate cycle and small-cap performance. I think the driver of small cap underperformance this year has more to do with the artificial intelligence theme (bubble?). Just consider, the S&P 500 is up 15.6% this year, but the equal weight S&P is up about 4.6%, not far off VBR +1.5%. Basically, S&P 500 has done well because of very strong gains in AI-levered names like NVDA while most stocks are flat. Small caps have no major exposure to AI, so retur5ns there are more like the average S&P stock. I don't think the key factor is firm size, it's degree of leverage to AI.

Frank F

3:37

I know you guys like Cameco in the uranium space, but recently I read that a good portion of their future production is committed at prices well below spot going far out into the future. If this is so wouldn't a miner that has no hedged production be better in a rising market for yellowcake?

Roger Conrad

3:37

Good question. If you believe uranium prices are going to remain at current levels or rise further then you'd obviously want to take a more aggressive position. Our view, however, is Cameco offers by far the better long-term value proposition because (1) it's locked in profitability and customers and therefore cash flows and (2) the uranium market is pretty hyped up these days on speculation of new demand--even though nuclear development needs decades. Also note Cameco stock has been trading above our highest recommended entry point, which we haven't raised above 40.

Nuclear power growth looks like a solid long-term trend to bet on and Cameco is a great company. But many of the stocks have come a long way in a hurry.

Boris

3:43

Hi Roger and Elliott.
Coal prices have been increasing lately due to demand from Asian countries. To my knowledge, ARLP is a coal producer with a domestic customer base and limited imports. Despite long-term contracts, some of ARLP’s customers are facing the potential risk of eventual closure. Is this a significant concern for the company’s future revenue streams? What am I missing in terms of the investment thesis? Many thanks for your insights.

Roger Conrad

3:43

Hi Boris. Yes, the US is still phasing out aging coal-fired power plants, mainly because they're becoming increasingly expensive to operate versus a combination of natural gas and solar. Closing dates have been extended for several to allow time for new sources to meet rising demand for electricity from artificial intelligence-enabled data centers. But Alliance Resource Partners has been shifting its business the past few years to a revenue model that's progressively more reliant on exports--especially to Asia--and less so on US utility contracts. It means revenue and cash flow are far more exposed to commodity price volatility than in the past--and that ultimately means volatility in the dividend. My view is management has the resources to hold the current level of 70 cents per quarter for the foreseeable future--especially with US demand not falling as quickly as thought a couple years ago. And the stock is priced for a 50% cut in my view. But the risk of a cut is good reason not to pay more than 22.

Guest

3:50

What are your thoughts concerning deploying cash from money markets to other yielding investments given the lightly fall of money market interest rates. Any thoughts on timing?

Elliott Gue

3:50

This is actually one of the core considerations within our new Smart Bonds service. Our view is that short-term rates are likely to remain near current levels for a few more months, so our bond ETF recommendations tend to have durations -- basically interest rate sensitivity -- that's lower than the main bond benchmarks out there. Since most money market funds are heavily invested in Treasury Bills (short-term government bonds) short duration bond ETFs are more or less equivalent to a money market fund. We also recommend significant floating rate exposure, which will tend to hold up well when rates remain high and/or rise. However, at some point over the next 3 to 6 months , there's likely to be a shift -- as the Fed cut cycle comes into view, we're likely to start moving into longer duration bond ETFs, which tend to benefit more from falling rates.

Roger Conrad

3:50

That's definitely the plan for our advisory services that have a cash component. CUI Plus/CT Income, for example, has a roughly 25% cash position in Vanguard Federal Money Market, which yields about 5.4%. That's about five times what I would like it to be.

That said, I still don't think we should be in a rush to deploy cash. The risk free yield is high. And this stock market is very top heavy with the Fed still pursuing tight money, which means a recession and at least a stock market retreat is possible. Rather, take new positions incrementally--for example by buying a third position now, the second third in six weeks and the last six weeks after that. The focus stocks in CUI, REIT Sheet etc are good place for income investors to start putting money. And we're looking at new recommendations for CUI Plus as well.

DRG

3:54

Hi Roger/Elliott:
Like to know your thoughts on the prospect of WMB? Any reason why it didn’t make the Managed Portfolio list? Thanks

Roger Conrad

3:54

Williams Companies has been a pretty consistent buy recommendation in Energy and Income Advisor--we track it in the MLPs and Midstream coverage universe table on the EIA website as a buy up to 38. And it's tracked in CUI as well as one of a handful of "utility like" midstream companies.

I guess the main reason Williams is not in the Managed Portfolio is we've always seen other midstreams as being more appealing buys--based on a combination of business quality, growth and price. And at this point, the primary challenge for us is price, as the stock's yield is just 4.5%--versus 7-9% for the midstream stocks we hold.

Guest

3:57

That was meant to be the likely fall in interest rates.

Roger Conrad

3:57

I knew what you meant. Hopefully my answer to your question conveys that. Another point I would make is longer-term borrowing costs have already dropped for many companies we like, which is a major plus. High money market rates are holding back buyers of dividend stocks. And until the Fed pivots to lower rates, that will likely remain the case.

Victor

4:00

Elliott, some commodity analysts have said that weak economic data remains supportive of gold. Analysts note that gold is becoming sensitive to the U.S. government’s rising debt ahead of the 2024 November Election. The CBO increased the estimated budget deficit for the current fiscal year to $408 billion. However, gold and silver are moving lower from their highs. Is this a new trend? Do you expect GLD and SLV to go lower from here?

Elliott Gue

4:00

I'm in the bull camp when it comes to gold and silver.

Technically speaking, gold prices broke out of a basing pattern under about 2075/oz. This basing pattern started in the summer of 2020, so it was a long-term consolidation. Gold then ran up all the way to 2450 in May.

Yes, we've pulled back, but only by 5% or so from the absolute peak -- that's normal volatility in my view, not the start of a new downtrend.

What's particularly impressive is that gold has rallied despite the fact US government bond yields are actually higher today than at the start of the year as is the US dollar index.

A strong dollar and rising yields are normally bearish for gold/silver and when a commodity rallies on what should be "bad" news, that's extremely bullish.

Elliott Gue

4:00

Fundamentally, my view is that US economic data continues to soften and the Fed starts cutting rates later this year. I believe the risk of recession is low now, but if the data continues to disappoint that could change quickly, giving the Fed cover to cut more aggressively than the market believes. This should be a positive environment for gold and silver.

Guest

4:02

I had substantial positions in ERF and AQNU. Now that they have stock conversion and sale have been concluded and the air is clear, what are your recommendations going forward?

Roger Conrad

4:02

I highlighted Enerplus' acquirer Chord Energy (NSDQ: CHRD) as one of the variable dividend paying stocks in our coverage universe. I rate it a buy up to 170--and would advise shareholders of the former ERF to hold the CHRD shares received. For one thing the dividend is a lot higher. And the combined company is a great deal more resilient as well.

The conversion of AQNU into AQN shares is another step in Algonquin Power & Utilities' financial recovery. The next step will be completing the sale of the company's 42.16% ownership interest in Atlantica Sustainable, which should wrap up later this year and will provide over $1 bil for debt reduction. And part three will be the sale of the rest of the unregulated renewable energy assets, leaving just the mid-sized regulated electric, gas and water utility as a takeover target or a company capable of growing earnings and dividends 5-7% a year. I intend to stay with the AQN common.

Jim Thomas

4:03

Now that the ERF to CHRD and the AQNU to AQN transactions have been complete, what are your assessments for the shareholders and should we hold or sell?

Roger Conrad

4:03

Hi Jim. I suspect you just submitted this very question as a guest. Please see my answer--basically to stay with both Chord and Algonquin.

Boris

4:05

Resending prior question (in the event it didn't sent the first time), apologies if you already answered it!

Roger Conrad

4:05

Hi Boris. I did answer. We apologize to anyone having trouble submitting questions. Hopefully it's getting easier not harder.

Guest

4:12

Thanks for holding these sessions! What's going on with NFE? The stock keeps going down even though other energy stocks are going up. How does its forward EV/EBITDA compare to other relevant comparator companies? Thanks!

Roger Conrad

4:12

I think a couple things happened here. First, New Fortress paid a special dividend of $3 a share back in early 2023 and a lot of people seemed to assume that would be the new dividend rate. The 10 cents per quarter paid since is decidedly less appealing and the stock has dropped to reflect that. Second, this company's core business is LNG, and there's been considerable disruption in recent months--starting with the freeze on new US permits for LNG export facilities but continuing with weakness in China as a major consumer and transit disruption in the Red Sea. The company this month also announced it would push back first LNG from its floating facility off the Mexican coast to July--some nine months after the initially expected startup date. I think concern about the Mexican election and what it might mean for foreign investment is another reason for underperformance.

All that said, New Fortress' Q1 results were solid and development plans appear to remain on track. And that's what we should see in August,

Roger Conrad

4:12

Our advice for more aggressive investors is still to buy at 35 or less.

Elliott Gue

4:14

One from the e-mail queue: Dear Folks, I would like to check in with you regarding your recommendation for OVV, which has dropped quite a bit recently. Are you still bullish on oil producers like OVV? Any thoughts on why oil/gas prices seem to be sleeping? If we are heading into an economic downtown, won't they slip a good deal more? Many thanx for your always sage counsel. Answer: There were some concerns about oil demand last spring rising out of the weekly EIA inventory "products supplied" statistics and a weaker crack spread. However, both have since reversed higher, suggesting US oil demand remains robust this summer. Also OPEC+ decision to return some barrels this fall spooked oil; however, prices have recovered all those losses and then some since that time. I suspect oil prices are likely to remain in their current range near-term -- that's high $70's to high $80s/bbl for WTI, which is supportive of most energy stocks. US natgas prices have been on a roll since May.

Current futures pricing is $3.50+ into early 2025 and $4+ into late next year. That’s a solid curve for high quality US producers like CHK. Energy stocks pulled back alongside oil in May-June but it looms like a correction rather than the start of a more meaningful downtrend. The recovery in oil gas prices since the lows in May/June should support the group going forward in our view.
As for the economic cycle, two points. First, we’re not seeing evidence of an imminent recession in the US just yet. If we do, I suspect Saudi may hold off on returning barrels to the market.
Second, while oil/gas prices usually do fall in recessions, energy stocks are known as late cycle performers. They usually find their pre-recession peak after the market as a whole. For example, energy peaked in June 2008 compared to October 2007 for the rest of the S&P 500.

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