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6/29/22 Capitalist Times Live Chat
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AvatarRoger Conrad
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Hello everyone and welcome to our Capitalist Times webchat for June 2022. As always, there is no audio in this event. Just type in your questions and Elliott and I will get to them as soon as we can concisely and comprehensively. Should you need to leave the chat before your question is answered, remember that we will be sending you a link to the complete transcript of the Q&A early Thursday morning if not before. The chat will conclude when we’ve answered all of the questions in the queue, as well as what we received prior to the chat.
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Thanks in advance to everyone participating today. We’re going to start the chat with answers to questions received the past few days.

Q. Hi Roger. I hope all is well. A couple of years ago I set up an account where I focused on investments that you and Elliot recommended in your various publications. The account has performed admirably with respect both to growth and dividend income - thanks!
Despite the current Bear market, most remain in the green, a few substantially. However, the REIT Medical Properties Trust (NYSE: MPW) and the closed-end fund Blackstone Infrastructure (NYSE: BUI) are down enough that I am contemplating selling both to capture tax losses and would likely buy them back after thirty days. 

Are you aware of anything forthcoming in the next 30-45 days that could/should cause significant price movement in either MPW or BUI? I am not averse to going to cash for the month. But are there any market equivalents to MPW and/or BUI that you would recommend as placeholders? Perhaps Schwab US REIT (NYSE: SCHH) or Invesco KBW Premium Yield (NYSE: KBWY) and Reaves Utility Income Fund (NYSE: UTG) to maintain rough parity with any market moves? Best Regards--Arthur H.

A. Hi Arthur. Thank you for those kind words. Medical Properties’ next big date on the
the calendar is at the end of July, when management is expected to release Q2 results and update guidance. It’s possible the REIT will have news on the Utah hospital sale, which will diversify its tenant base and could provide a lift to the shares. The shares have also come off the bottom but short interest is still quite elevated at almost 8% of float—which means if business results are steady there’s a real possibility of a short squeeze. My view is the REIT is still a buy for those who don’t already own it. But I’m not adding to the position in the CUI Plus/CT Income Portfolio and I never recommend anyone really load up on any one stock.

With the closed end fund, I also don’t see a lot of risk from this level. The holdings are all solid and have or will raise dividends this year at least once. And they’re all trading at low valuations, which should limit downside from here. The fund is actually at a slight discount to NAV versus what’s historically been a premium. And it doesn’t use leverage, which means
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means it won’t have to liquidate positions in a sudden downturn.

Bottom line is we’re staying with both positions in the portfolio and will continue to do so. As for selling and buying back to avoid the wash rule, if I had to guess I’d say odds favor both BUI and MPW trading around where they are now in a month—but I wouldn’t make too big a bet on it either. I haven’t really followed the Schwab or Invesco REIT ETFs. Based on their most recent holdings, the Schwab ETF looks a lot like the S&P REIT Index—heavy on wireless towers, data centers rather than conventional REITs. KBWY is a good bit more idiosyncratic as it just goes for the highest yield and several of the REITs inside are carrying considerable dividend risk heading into an increasingly likely recession.

I do recommend the Reaves fund in Conrad’s Utility Investor, though I believe investors are better off picking their own stocks. It could be a decent
substitute for the Blackrock closed-end fund, though it’s mostly US REITs.

Q. Mueller Industries (NYSE: MLI) looks cheap with growing sales and a PE of 5.26 and a beta of 1.06. Does it have a place in a conservative portfolio—Monroe J.
 
A. Hi Monroe. This company’s core products are certainly always needed. And that shows up in the generally steady revenue over the years, and more recently some pretty strong dividend growth. I do have some question about management’s ability to pass through rising commodity/raw materials costs over time, particularly if the economy slides into a recession this year. The yield is also lower than we usually like. And low P/Es are common for cyclical stocks when the economy is running strong. Bottom line is this looks like a company that’s built to last but this may not be the time in the cycle to buy it. I note with interest that insiders have been particularly heavy
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sellers around $60 a share, which isn’t too far above where this stock is trading now.

Q. When you go to your site and use the search feature, it doesn't search everything you guys do. If you search Devon Energy (NYSE: DVN), it will not search the live chats that you have the transcripts from. There may be other publications that are being missed too. I also checked for Valero Energy (NYSE: VLO) and results miss your newsletters as well as the portfolios. Please talk to your tech people about this as I think it’s very important to the members. 
Thanks for all your research along the way. Your guidance is very appreciated. Do you fear the legalization of lending and banking with the pot industry will destroy the margins for Innovative Industrial Properties (NSDQ: IIPR)? It’s down a lot and I wonder if a recent article on this matter
has spooked investors, along with a general selloff? Do you have a buy under target for DVN and an outlook for the company? Thanks again—Eric J
A. Hi Eric. Thanks for bringing the issue about the search function to our attention. We do want readers to be able to access our past and present research and there is a lot there to search.

We currently rate Devon Energy a buy on dips to 40 or lower. The company is tracked in our “Exploration & Production and Services” table, which can be accessed on the Energy and Income Advisor website under the “Portfolios” tab. That’s a good bit below the current price and reflects both our view that there are better placed producers and expectation that frothier energy stocks are likely to retreat with oil and gas prices later this year, as a recession takes hold.

Innovative Industrial Properties basically owns and leases land and buildings/facilities to marijuana farmers around the country. And despite
despite rapid growth of legal sales for both medical and recreational usage, it’s fair to say this is a relatively new business and that therefore the financial strength of tenants is untested.

This REIT is still buying new properties and entering long-term leases, most recently a $12 mil deal in Texas. And as the largest player, it is also the best connected to vertically integrated license holders to grow and sell, which is especially important with medical cannabis. That’s a sign of strength. My read of Q1 numbers and management guidance was also positive. And with about $350 mil of debt, the company appears to be fairly conservatively financed.

What does make me a little wary right now, however, is the high volume of shareholder lawsuits against the company. At this point, it’s hard to say what the merits are of the various cases. And Wall Street analysts tracking the stock are bullish—with 7 buys, 1 hold and no sells of those tracked by Bloomberg Intelligence. But in view of the lawsuits combined with
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with the magnitude of the drop so far this year (-58.6% to date), I think this is a REIT best watched rather than bought at least for the time being.

Q. Hi Roger. Interactive Brokers lists the value of Woodside Energy Group (ASX: WDS, NYSE: WDS) shares from the spinoff/merger of BHP Group’s (ASX: BHP, NYSE: BHP) as $12.73/share. This seems to be a lot lower than the figure you have used. Of course, doesn’t really matter as long as you use the same number for the BHP return of capital and the WDS cost, but it will make a difference at tax time when you sell WDS.—Cuper
 
A. Hi Cuper. Our accounting for the spinoff in the CUI Plus/CT Income Portfolio was pretty simple. I just took the number of BHP ADRs we have in the Portfolio (130) and multiplied by the exchange ratio to get 46.982 shares. I then subtracted the value of those shares on the day of the spinoff/merger (June 1) from the cost basis we have for the BHP ADRs.
One reason the Interactive Brokers value might be different is that BHP’s NYSE-listed ADRs are actually worth two ordinary shares traded on the ASX—and the exchange ratio as published is based on the ASX ordinary shares. To get the ADR value, you have to multiply by two.

In any case, I’m still holding the Woodside shares—which now trade as an NYSE-listed ADR (WDS)—in the CUI Plus/CT Income as basically a rump position. That means I may recommend selling or bulking it up from its current roughly 1%. And I continue to rate Woodside ADRs as a buy at 25 or lower—they’re also tracked on the Energy and Income Advisor website in our “Canada and Australia” table, which can be found by clicking on the Portfolios tab.

Q. Hi. My name is Andrew and I wanted to submit a couple of question in advance of todays Chat. Berkshire Hathaway Energy
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Energy is involved in several areas and I wanted to get your thoughts on the companies energy business. I was hoping to learn more about which companies you might compare them to and if Berkshire’s energy business is something you would consider rating despite being part of a larger company.

I also wanted to get your thoughts on if consolidation still makes sense for regulated utilities, or if you believe most will invest in renewables and transmission to grow. I had been looking at smaller utilities such as Idacorp (NYSE: IDA), Portland General (NYSE: POR), Pinnacle West (NYSE: PNW) and Allete (NYSE: ALE) as examples of smaller “tuck in” candidates for larger utilities to purchase. I am not sure if regulatory and business models have changed making mergers impractical.

Which types of electric companies will benefit most from the transition towards electric cars? I am not sure if utilities will profit from charging stations, or if they will profit from investing in more capacity needed for those stations.
. Should companies focused on transmission benefit more than companies focused on generation and are companies in specific geographic markets that you believe would do better then others? Thanks for your guidance.--Andrew M.
 
A. Hi Andrew. Thank you for your questions. Berkshire Hathaway Energy is at this point one of the largest regulated utilities in the US, including the former IE Industries, Nevada Power, PacifiCorp and Sierra Pacific Power. And Mr. Buffett has made no secret that he’d like to own more utilities, at the right price. It’s significant that these acquisitions were all made in previous decades, when the sector was considerably weaker financially and therefore traded at much lower valuations.
 
I would consider any of the four utilities you mention as potential candidates for a merger with Berkshire. IdaCorp and Portland General in particular have numerous connections with the former PacifiCorp in the Northwest US. Allete would fit well with the company’s units in the Midwest. And while
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Pinnacle West has nuclear power—an area Buffett has avoided to date—it is a valuable franchise with enormous potential in solar.
 
On the other hand, utilities are by far not the biggest piece of Berkshire Hathaway or driver of its earnings. So while I do track the company’s activities as part of my analysis in CUI, I haven’t viewed BRK/B to this point as really being a fit for the Utility Report Card. I will say Berkshire is one of my largest personal holdings—always been glad I bought it those decades ago.
 
As for your questions about utility M&A and EVs, I think both will factor meaningfully in utility stock returns going forward. The history of utilities is one of building scale and not one of the literally thousands of mergers between operating companies the last century and a half has failed to create a stronger utility.
 
You’re right utilities have a lot of growth ahead with spending on the energy transition. But here too, scaling up is an advantage when it comes to hiring, procurement, raising
capital and spreading out costs. So while the regulatory picture may have become a bit more difficult to get deals done, companies are still planning them and will make their move when the time is right. I still think we’ll see an offer for Southwest Gas sometime this year. And I believe odds favor Avangrid closing on PNM Resources sometime next year.
 
With EVs, utilities profit when they build charging stations and add the investment to rate base. It’s a simple formula with very little risk to companies and I believe will begin adding meaningfully to earnings the next few years, as it already is for Edison International (NYSE: EIX) in California.
 
 
Q. Roger. Is there any company specific news driving the 25% to 30% reduction in FirstEnergy (NYSE: FE) stock price—or was it just swept up by the overall negativity of the market? Is First Energy some other company your favorite regulated utility at this moment?
Do you have an opinion on the TDS (NYSE: TDS) preferred shares, either of the two batches? Both are trading with yields well below par and yield well in excess of 7%--seems to good to be true. It seems to be priced like TDS is losing money, but they’re profitable. You like the common stock since it is in one of the portfolios. Do you like the common or the preferred shares better at these prices? Thanks—Rick P.

A. Hi Rick. FirstEnergy for much of the past year or so has actually traded above my “consider taking profits” level of $45, which has given Conrad’s Utility Investor readers a great opportunity to take money off the table at a great price. Now the shares are actually back at a good entry point, even as the company has reduced its financial risk by cutting debt significantly. I expect both Fitch and Moody’s to follow S&P’s lead in restoring investment grade ratings at the utility later this year. And I would look for a return to regular annual dividend growth next year.

Bottom line: FirstEnergy
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shares benefitted from runaway upside momentum that took the valuation well beyond what was sustainable. That big mo has since reversed and the price is back at a good level yielding a bit over 4%.

As for TDS, the stock has been weak this year, following the market but also under the influence of a JP Morgan analyst who has worried about competition and high levels of CAPEX to build out 5G and fiber broadband. But the dividend is still well covered with earnings and cash flow long term—and it’s growing. I don’t see any real credit risk with the preferred stocks. But neither is going to grow its payout the way the common stock is. And though yields are high based on current prices, principal is still very much exposed to inflation and future interest rate increases. I prefer the common stock.

Q. Gentlemen. I’m retired and have always wanted a water stock, mainly American Water Works (NYSE: AWK) or Essential Utilities (NYSE: WTRG). Paltry dividends would dissuade me.
Now I don’t have the money to start a real position but I have a nice position in NextEra Energy (NYSE: NEE) and I see they now have a NextEra Water unit providing water services for municipalities. I suspect these guys aren’t going to play around. Maybe NEE can be my “water stock as well.” Just keep adding to NEE for my desired water coverage? Thanks--David O,

A. Hi David. I think NextEra is utilizing the regional expertise it has developed around the country as it’s built out wind, solar and energy storage assets. That includes knowledge of regulators and local governments that award contracts.

The risk is this becomes a distraction. And of course, Enron had its Azurix water foray, which conjures up disturbing memories. As always, I want to see how the company executes. This is not a major operation at this time, so risk to the overall balance sheet are low. And it’s certainly not the only bet NextEra has—earlier this month, it announced a major effort to swap out natural gas for hydrogen as a fuel for
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power plants in south Florida. Next earnings are in late July. And the increased guidance issued earlier this month is promising. That to me is good reason to keep NextEra a buy up to 80. But for a water stock, American Water and Essential Utilities are where I’d place my bet. Essential yields a bit more and will raise again next month.

Q. Can you separate the first 14 pages from the data table in the REIT Sheet. I don’t want to print out the 68 pages each time. The way you have it formatted I can only print the full report. Thank you.—Hank W.

A. Thank you for the suggestion Hank. The full databank appears once a quarter—in March, June, September and December—which corresponds to quarterly earnings reporting and guidance updates
. So the issues in between will be considerably shorter. But we will look into this.

Q. Hi Sherry. I think I spotted a mistake in the recent REIT Sheet. The current edition says that SL Green (NYSE: SLG) was upgraded to hold from a sell. However, in the February, March and April REIT Sheets I received, SL Green was listed as a buy. It’s possible that I missed something. However, if I am correct can you please clarify.
 
A. Hi Robert. The problem appears to be you did not receive the May REIT Sheet. Here’s the full excerpt:
Selling SL Green
When I first recommended SL Green Realty (NYSE: SLG) in September 2020, my expectation was the first tier Manhattan offices it owns would by this time be operating more or less at pre-pandemic rates. As it’s turned out, recovery has played out far more slowly, with management successfully re-leasing key properties but at lower rents. And the REIT’s previous reliance on variable rate debt has become a threat to meeting the mid-point of current 2022 FFO guidance as well.

Even in a worst case, SL’s current monthly dividend of 31.08 should be covered with distributable earnings by close to a 2-to-1 margin. And management’s first office building purchase since 2018 at 450 Park Avenue is both a sign of long-term confidence and affirmation the balance sheet remains strong. But unlike our other picks, this REIT’s business momentum appears stalled. And while I hate to sell after a decline, I’d rather book what gain we still have now than bet against further weakness, even if that means forgoing the
monthly dividend payable to shareholders of record May 31.

I will have more in depth coverage in the June issue of the REIT Sheet, including the full databank of 90 individual real estate investment trusts. For now, my advice is to sell SL Green and deploy the proceeds into any of the stocks on the “First Rate REITs” table below that trade at or below maximum recommended entry points.
 

At this point, I’m still concerned that SL Green’s business has not yet hit bottom. And I raised it from sell to hold mainly because of how far it’s dropped.

But I’m more concerned that either you did not receive the May REIT Sheet update--or the advice removing SL Green from the Recommended List may have been buried and was therefore not useful to you.
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There were no changes to the List in the June issue. But in future, if there are, I will try to do a better job of highlighting them.

Q. Roger or Elliott, my name is Steve Grisell and I am a happy long term subscriber to both Conrad’s Utility Investor and Energy and Income Advisor. Please keep up the great and detailed work. Thank You! My question is as follows: I am looking at renewing my electricity contract and looking at future pricing! Wow! It looks to me like my best pricing is to lock a rate for two years versus one year.
I am trying to best guess natural gas pricing into the future. My guess is it will stay in a range where we currently are, with demand increasing during winter and maybe the soft landing the Federal Reserve is driving for. I respect your opinions regarding this matter and recognize it is a long look into the future- your response is appreciated.
Respectfully submitted--Steve G.

A. Hi Steve. Our contention for the past few months has been that natural gas prices were entering the same longer-term upcycle as oil—owing in large part to the same underinvestment in new supply and infrastructure. But we also remain concerned prices are overheated in the near term. And we are quite concerned the Fed will not be able to engineer a soft landing for the economy and will remain more concerned about controlling inflation until there’s a compelling reason not to be—which isn’t likely to happen until growth slows.
That would mean lower gas prices over the next several months, which combined with new wind and solar supply would put downward pressure on wholesale electricity prices. I live in one of the 34 states (Virginia) where power companies still operate as regulated monopolies. But my advice for those who buy power through a marketer would be to stay conservative. That would mean locking in a price but with one of the larger companies that has financial resources to make good on its obligations in the event of a market shock—such as Winter Storm Uri was in Texas during winter 2021.

A two-year lock would reduce risk to some sort of spike in energy costs obviously. But again, if there’s a recession, the price of electricity is far more likely to drop than rise. And prices as you’ve commented are at pretty high levels now.

Q. Good morning, Roger. I have two questions for today. When a stock gets 15% above your highest buy price, I usually sell and look for something below your highest buy price. Do you think that
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is a good idea? Selling is always a harder decision than buying.
 
Does you REIT Sheet cover IIPR? I read an article recently suggesting that many of their tenants are financially weak. Looking forward to today’s chat.—Ken V.
 
A. Hi Ken. First, I don’t have much to add to my comments on Innovative Industrial Properties (NYSE: IIPR) from what I answered in the earlier pre-chat question. It appears to be a very well managed REIT that’s captured a strong niche in a growing and very likely recession resistant market. But the magnitude of shareholder lawsuits against it makes me hesitant
to recommend or buy—at least until we see another round of earnings that will be in early August. In the meantime, there are plenty of other REITs yielding 6% or even higher without that hanging over them.
 
Your selling discipline is similar to what I’ve been doing the past few years in Conrad’s Utility Investor—though I’ve tended to give stocks a little more room to run with the momentum by setting higher “consider taking profits” targets than 15%. My calculation rather is based on the number of quarterly dividends it would take to bridge the gap between the current price and my highest recommended entry price. And I also don’t usually recommend selling the whole thing, but enough to bring it back into balance with everything else you have.
In any case, I like the idea of taking money off the table when momentum runs too far in one direction—as well as jumping in feet first when stocks of companies still strong on the inside sink to “Dream Buy” levels. I think we’ll have plenty of opportunity to do both in coming years—at least so long as so many investors are buying ETFs and other passive investments rather than taking responsibility to pick their own stocks.
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OK. That's all we have from the pre-chat questions. Now let's get to some live ones.
Ron
2:09
The EU announced today they are requiring 0 carbon emissions for autos by 2035. Is this realistic in your view and what impact will this have on future growth for oil and gas companies.
AvatarElliott Gue
2:09
I don't think that's realistic. I suspect market and economic realities will force many of these targets to be rolled back, just as it's forcing many European countries to U-turn on coal plant retirements right now. However, even if that were to happen, oil demand from autos is a small portion of total oil demand and the EU is a small (and shrinking) portion of global oil demand. I don't see emissions targets having much of an impact on oil and gas prices until such a time when the supply/demand situation for fossil fuels is more in balance than is the case right now or over the next few years.
Sohel
2:10
Thanks for holding these chats - really useful. What is your outlook for recession in next 12-24 months? Correspondingly, what is your outlook for overall market in the near term (rest of the year)?
AvatarRoger Conrad
2:10
I'm sure Elliott will have something to say on this. But despite the Fed Chairman's confidence that the central bank can quell inflation without causing a recession, I don't think it's wise for investors to bank on it. In fact, I think how well companies are prepared for a recession will be the major difference maker for investor returns over the next year. In our favor is the fact that the US just went through a major contractionary event two years ago--with the fallout from the pandemic lockdowns and other measures. That means leverage hasn't likely climbed back to where  we could see something like the 2007-09 Financial Crisis, for example. But I also think this inflation has other causes that aren't going to be resolved necessarily by raising interest rates--supply chain concerns, lack of investment in oil and gas etc. And keep in mind that the purpose of raising rates is to cool off activity.
Andrew
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Hello!

Are smaller utilities that generate the majority of income from regulated business better positioned then larger companies given they have a monopoly in their service area. I was thinking about companies like Idacorp, pinnacle west etc. that have a larger portion of one states service area and wondering if they still have a competitive advantage or should I be searching for larger diversified companies that does business in multiple states.

Thank you for your thoughts.
AvatarRoger Conrad
2:21
Hi Andrew. Company size doesn't correlate with the percentage of a utility's business that's regulated. Otter Tail Power (NSDQ: OTTR), for example, has a market cap of just $2.7 bil and more than half its earnings the last 12 months came from non-utility businesses. Exelon (NYSE: EXC) in contrast has a $44 bil market cap and essentially 100% of its earnings are from regulated utility businesses.

As for whether it's better to have one utility business in a single state or multiple utility units across several, the key is really the state. Arizona, for example, has emerged as a dangerous regulatory environment for utilities--as the elected regulators have apparently decided to adopt populist utility bashing. And the result is a big earnings shortfall for Pinnacle West--not fatal but definitely has made the stock less attractive.
AvatarRoger Conrad
2:25
Continuing on Andrew's question, we have a mix of multi-state and single state utilities in the Conrad's Utility Investor portfolios--as well as companies like NextEra Energy that have proven they can make consistent returns in lower risk unregulated businesses like generating wind and solar power under long-term contracts. A higher portion of unregulated revenue and depending on a single state do all else equal bring more risk. But the key is always how well the individual company is managing its business. And earnings season allows us to see that.
Robert P
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Hi Roger and Elliott, recently articles are being written about Occidental Petroleum and Warren Buffett or Berkshire Hathaway.
In your opinion what are your thoughts on a Berkshire bid to purchase Oxy. True, a lot of stock has been purchased the past couple years by Berkshire and Buffett has not shied away from fossil fuels. Your opinions on this and what could the share possibly fetch for such a transaction? 
Thanks for all you do, and after 25 years, my portfolio has evolved from much of your research and proud to say your both the best in the business.
AvatarElliott Gue
2:26
Thank you for your kind comments, they're very much appreciated. While we believed that OXY shares got a little ahead of themselves earlier this year, we still think it's undervalued longer term. There are two components with OXY in my view: 1. The broader backdrop for energy stocks and the outlook for the commodity, free cash flow and 2. OXY's relative valuation to other major oil and gas producers and its net debt. So, two years ago, both 1 and 2 worked against OXY -- the commodity backdrop was weak, sentiment was weak and OXY was struggling with a mountain of debt that made it look like a weak hand relative to a name like XOM or CVX for example. Today, we think both 1 and 2 are working in OXY's favor. Yes, it's likely that in a recession oil prices will come down a bit (demand concerns is what's driven the recent retrenchment in oil prices). However, the supply side remains challenged and that's not likely to change for at least 5 years. So, I see oil and natgas prices in a higher for longer situation.
AvatarElliott Gue
2:26
The situation is not unlike the period from 1999 through 2009 -- economy had some struggles over this time period, two recessions, but oil prices were generally on an uptrend and energy stocks trounced the market. As for point #2, OXY is right-sizing its debt even faster than I'd expected (and we've been bullish on their ability to do so). So, I look at OXY trading at 5.8 times Free cash flow compared to XOM at 9.5 times and CVX at 11.5 times. If OXY were to close that gap, it's worth north of $100 in my view. I do think a Berkshire takeover is possible eventually as it fits the profile of company Buffett is interested in, but I think OXY could get there on its own.
Guest
2:30
What do you think about Enviva (EVA)? It is providing wood pellets as an alternative to coal.
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