JotCast | 6/29/22 Capitalist Times Live Chat

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6/29/22 Capitalist Times Live Chat

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Elliott Gue

2:30

The market right now favors companies with strong near-term free cash flow prospects over "story" and growth stocks. I suspect that's likely to continue for some time given that the generational change in the inflation outlook has forced a global shift (except arguably for Japan) in favor of higher rates. EVA isn't expected to generate meaningful FCF through at least 2025 and I think that's a problem in this environment.

Pamela

2:31

Hello Roger, and thank you once again for all your sage and sensible advice over the years. Could you please give me your thoughts on SOHO? The stock has moved favorably in the last few days, but all I can find for news is a successful refinancing of a property in Florida, and a sale of a property that should help retire some corporate debt.

Also, could you PLEASE PLEASE PLEASE present the general update of all REITS in a more user friendly fashion? It is almost impossible to read with the headings falling off the page as one scrolls down. It is hard to download as well as I have to export to Excel and then make a lot of adjustments. It would be great if you could use the same format you have for CUI. Also, could you please let us have Dream Prices for both the REIT sheet and for CUI+ as you have in CUI?

Roger Conrad

2:31

Thanks for the suggestions Pamela on the REIT Sheet. It's been suggested in this chat that we separate the REIT databank--which is published every three months to correspond to earnings reporting and guidance updates--from the rest of the issue as we currently do the coverage universes in CUI and Energy and Income Advisor. I think that would probably solve the formatting problem.
Regarding Sotherly Hotels, next earnings are expected in mid-August. As you've noted, management is currently paying down and refinancing debt, which ballooned during the pandemic. I think it's ensuring long-term survival. But EBITDA is still about a third less than in 2019, so there's more to do. I rate it a hold.

Guest

2:36

Hi Roger, what are your current opinion on HPQ and CSCO stock and company?

Roger Conrad

2:36

We're staying with both in our CUI Plus/CT Income Portfolio, Cisco a buy under 55 and HP below 40. They're both dominant in their niches and have strong balance sheets and recurring free cash flow to support dividend growth, even in a recession. Stocks are cheap now mainly because of supply chain impacts on costs and sales. But at less than 8X expected next 12 months earnings, HP is pricing in a lot of future bad news that seems unlikely to happen. So is Cisco at 12.5 times. And keep in mind that difficult conditions usually boost the leaders of a market over their less well-heeled rivals.

Sam

2:39

For Roger Conrad,
I am a subscriber to your Conrad’s Utility Investor.
In this week’s email you state, “For more on the ins and outs as well as my top sector recommendations, check out the June REIT Sheet posted last week.”
I read your June 18 article on REIT’s, and did not find any REIT recommendations. Please tell me how I can find your REIT recommendations or specifically, what are they? .
Thank you

Roger Conrad

2:39

, Hi Sam. My real estate investment trust recommendations are the subject of my advisory "The REIT Sheet." I provide buy/hold/sell advice for roughly 90 individual REITs, as well as analysis of the various REIT sectors. If you're interested in seeing a copy, please give Sherry a call at 877-302-0749.

Dividend Pig

2:43

Thanks for all your hard work. If you both had to pick one stock that represents the best value today, what stock and why? Cheers

Elliott Gue

2:43

Specifically within energy, I think it's tough to go wrong with Exxon Mobil (XOM) longer term. I do think we could see significant volatility in energy stocks through a recession (which I expect by early 2023 at the latest) however, in such an environment, I like to circle the wagons around a handful of high-quality names of which XOM would be one. Also, XOM is up a lot this year but, as with most energy stocks, it's still cheap relative to longer term norms and given the outlook for free cash flow in a supercycle.

David S.

2:47

Roger, do you still feel sanguine about your "pick of the year" CEQP? Seems to be lagging its peers.

Roger Conrad

2:47

Hi David. I still like Crestwood Equity Partners a great deal--in fact, as you point out, you actually have a better entry point now than earlier this month. So far this month, CEQP is off about -16%, taking its recently increased yield over 10%. That's a slight underperformance of the -13.5% for the Alerian MLP Index. If you're looking for possible answers, one might be that Crestwood has stayed aggressive with acquisitions this year--earlier this month buying Sendero Midstream for $600 mil, adding gas gathering and processing capacity in the Permian Basin of New Mexico. That was pared with a deal to sell Barnett shale assets for $1.2 bil, so the net impact on the balance sheet is positive. But a potential recession has understandably made a lot of people cautious about M&A. In any case, I don't know of many investments with a 10% plus yield that's actually set to rise going forward. And I expect to see CEQP eventually take out its split-adjusted high in this cycle--which is well north of $100.

Guest

2:53

Hi Roger, BHP stock price hit hard on coming recession. Do you plan to hold this through a bear market or sell to preserve capital? What is your proposal on Woodside shares from the spin-off?

Roger Conrad

2:53

I do. BHP is the class of the mining industry--strong balance sheet, reserves mainly in politically safe places and close proximity to China, the world's largest market by far for iron ore, copper, met coal and the battery metals that are management's current focus. Shares are going to trade with iron ore and copper prices, since that still has the greatest impact on earnings near-term. But we're going to continue receiving big dividends--next in September. And if China does surprise to the upside, BHP will too even if the rest of the world is in recession.
My advice on Woodside shares is to hold them. The company faces a challenge in Australia getting its Scarborough LNG project to production. But with BHP assets it's now a dominant producer in Australia and the oil and gas investment deficit means we're only in the early stages of this energy cycle. The company's NYSE-listed ADRs are a buy up to 25 for anyone who doesn't already own them.

Ben F.

3:00

Cheers from New Mexico -

For those of us looking for stocks outside of the United States, any thoughts on

ENGIY ENGIE SA.

Roger Conrad

3:00

Thanks Ben. I think Engie is well positioned and I've rated its ADRs as a buy at 16 or lower. Shares are very cheap at 6 times expected next 12 months earnings and a yield of 7.5%, which pretty much prices in a lot of bad news that isn't likely to happen. The dividend is well protected by recurring earnings. And the company has a clear road to raise profitability going forward with renewable energy investment. Russian exposure is not significant at this point either. I do prefer Enel SpA (Italy: ENEL, OTC: ENLAY) in that group, which pays the same yield and trades at less than 10 times expected next 12 months earnings. In fact, it's below my Dream Buy price currently. The company has also completely exited Russia, shaving EUR550 mil in debt in the process.

Mike C.

3:06

Gentlemen (and Sherry) – As always, thank you for your steadfast work! It is much appreciated. For today’s chat…in the current environment, what are your thoughts about hedging in EIA, REITs, metals, and/or the DDI-Income areas? (I know Roger has a utility hedge in his aggressive CUI portfolio.) I realize there’s the volatility decay problem with hedges, risk of a decent bear market rally, and all said, it may not be worth it…but as it looks like there’s more downside, it’s worth getting your thoughts.

Thank you

Roger Conrad

3:06

Thanks Mike. You comments are much appreciated. As you point out, I've held up ProShares UltraShort Utilities (NYSE: SDP) the past few years as a hedge to utility-heavy portfolios. Not surprisingly, it's lost money since then--in part to time value decay but also because utilities have pretty much kept going up over that time--hitting new all-time highs in late April. I've kept mentioning it mainly because in a full-blown decline, it's one investment that would go up, providing cash to buy stocks at Dream Buy prices. We have done the same thing in EIA with ProShares UltraShort Oil & Gas (NYSE: DUG)--though not lately because we believe we're still early days in a long-term price cycle. But we certainly could again if we believe recession pressures will knock a short-term hold into oil prices. In any case, I like your idea as something to mention, even if we don't actively employ these inverse ETFs in actual portfolios. Thank you.

Guest

3:18

Any thoughts on why Warner Bros Discovery Inc NASDAQ: WBD is getting hammered so badly? It's down 46% since the split. Thanks. Barry

Roger Conrad

3:18

I think one likely reason is just the direction downward direction the overall stock market has gone in compounded by generalized weakness in "streaming" stocks--the leader Netflix Inc (NSDQ: NFLX), for example, is actually lower by more than -70% year to date! As for anything specific to Warner, I think it's the fact that traditional AT&T owners have been cashing out, particularly larger investors. And the company has also been moving aggressively with its restructuring, which management has been up front about all along but may be making some nervous with a potential recession looming. My view since the spinoff has been at the very least we'll get a better selling price for hanging on. And that's still very much my view now, despite the drop in WBD shares the past couple months. This company has great assets, management is not afraid to be aggressive to boost profitability and the valuation is very low--so downside risk should be modest from here. Also not a business with particular recession risk.

Jeff

3:18

With the non stop talk of a recession what is your opinion on PXD, EOG, DVN, EPD, MMP going forward.

Elliott Gue

3:18

We continue to like and recommend PXD, EOG, EPD and MMP in the model portfolios though EOG and PXD have been above our buy targets for some time (PXD is finally dipping back down into our buy range now). That's because these stocks got a little ahead of themselves earlier this year given the spike in oil prices. While I wouldn't be surprised to see oil prices come down further if the US and global economy enter recession as I expect, I'm looking for a shallow dip in commodities and energy stocks that's more like what we saw back in 2001-02. The reason is that while recessions reduce demand and prices near term, they won't cure the supply-side shortages that are the main driver of the current cycle. Such pullbacks will be buying opportunities in energy stocks. We think DVN is a good company; however, their inventory position isn't as good as PXD/EOG so we prefer the latter.

Hans

3:23

Elliott, Your previous forecast for Natl Gas was to come down this summer, but it is still high. What is the outlook now for KOLD. Thanks.

Elliott Gue

3:23

I was early in my call for gas to come down but natural gas prices have started to retreat, having fallen from a peak of $9.32/MMBtu to a recent low nearer $6.25. I can still see natgas pulling back to around $4/MMBtu. Helping matters now is what appears to be a long-term outage of one of the US LNG export facilities, which reduces domestic gas demand. KOLD is a leveraged inverse ETF, which basically means that its value decays over time due to the inherent volatility of gas prices. But, we are bearish on natgas near-term and this should be bullish for KOLD over the next 2 to 3 months.

Terry

3:35

How do you factor in sell side analyst research in your evaluations? Do you have access to it, and/or believe it is worthwhile? For example, Merrill Lynch has sell recommendations AGR, AQN and HASI,,

Elliott Gue

3:35

We have access to sell-side research from a number of sources. Personally, I regularly read analyst reports and I have a few favored analysts I read in various sectors I follow closely. We both also sit through quarterly conference calls and analyst events for the companies we cover; it's important I think to be familiar with some of the other analysts who ask questions on these calls. I value, and have always valued, Wall Street research for a numbner of reasons including that 1. Maybe I'm a glutton for punishment, but I like to read reports written by those who disagree with me as it can help to point out potential issues with my outlook. 2. Reading Wall Street reports can help to illuminate key fundamentals or factors that are driving a particular stock or sector. 3. I sometimes get ideas for new names to follow or sectors to watch from Wall Street research. However, I tend to discount "buy" or "sell" ratings -- I find the tone/fundamentals discussed in the report are far more useful than the

Elliott Gue

3:35

buy/sell/hold advice and target prices. So, recommendations I/we make on stocks are a function of our independent research and assessment of the fundamentals rather than any particular analyst's buy/sell/hold advice.

Guest

3:37

Roger: in one of your other newsletters you have Altria Group Inc NYSE: MO as a stock to purchase and hold. Any thoughts since its sell-off this week about long term prospects for it?

Roger Conrad

3:37

As of this afternoon, we're currently down about -7.6% in our portfolio weighting of 130 shares of Altria including dividends received. The primary reason was the US Food and Drug Administration is rumored ready to ban Juul electronic cigarettes (vaping), in which the company has invested. And speculation has grown that the company will soon face competition from former affiliate Philip Morris International, as it buys Swedish Match. FDA has also drafted a rule to remove most nicotine from cigarettes with the goal of making them "minimally addictive."
Obviously, these are potential blows to earnings growth. But selling at 8.6 times expected next 12 months earnings and yielding close to 9%, shares are more than pricing in a worst case. And neither do these developments affect dividend safety with almost $17 bil in free cash flow expected the next two years. I will be looking closely at Q2 earnings and guidance next month. But at this point, I intend to hold Altria.

Jeff

3:40

Elliott, what is you view for Nat gas prices in the fall. You state you are bearish now. I own KMI, CIVI, and ETRN

Elliott Gue

3:40

Longer term I think we are in a $4.00+ average natural gas world here in the US with European and Asian gas prices likely to remain elevated and prone to upside spikes. Gone are the days of $2/MMBtu US gas in my view (at least on a sustained basis). US gas prices tend to spike higher and lower from time to time, so I'd likely view any spikes lower in gas prices this autumn, for example, to be a buying opportunity.

lee

3:43

do you see any issues with epd pertaining to oil reserves in thew areas they cover 3-5 years

Elliott Gue

3:43

Not really. With oil prices likely to remain elevated in our intermediate to longer term forecast, I think it will support production volumes from most major US basins. The US (and world) need all the oil they can get if the current supply/demand imbalance is to be resolved without an even bigger spike in prices.

Pete

3:43

I sure appreciate you guys. AGL Energy (AGLXY) seems like a bargain to me, so what am i missing? Any thoughts on it or on Australia recession?

Roger Conrad

3:43

In my view, AGL is a great speculation with its ADRs trading at less than USD6. The key is whether management, the new board and largest shareholder Mike Cannon-Brookes can cobble together a new direction that excites investors and attracts support of the country's new Labor government. I expect that plan--slated to be released in September--will include accelerated decarbonization that includes rapid coal power plant closure and a massive buildout of solar, as well as potential acquisitions in retail energy along the lines of Cannon-Brookes' vision for a "great unlock." That's a tall order but AGL comes into this as the country's largest producer of both conventional and renewable power, the biggest energy retailer and the leading distributed energy company. That's a lot of advantages to start with.

harry

3:56

is page undervalued with oil over $100.00. What bro you think is causing the volatility in ET? thanks

Roger Conrad

3:56

Hi Harry. I'm not finding a "page"--is there another symbol? Energy Transfer shares are following a general downtrend in midstream companies so far this month, pretty much tracking the Alerian MLP Index -13% decline since May 31 close. The important driver I think for ET is management is setting the stage to raise the quarterly dividend back to 30.5 cents a share from the current 20 cents over the next year. Earnings are expected August 3. Still rating it a buy up to 15.

Bonnie

4:02

Hello Roger! I hope all is well with you. Thank you for this informative chat. Some of the recommended stocks are thinly traded/"pink sheet" stocks so we can't always buy or sell on demand, and need to put in limit orders. Does this impact your view on amounts allocated to these stocks? Any example: We bought AGL on the OTC as AGLXY, and CWYUF, but could not buy them immediately.

Roger Conrad

4:02

Hi Bonnie. I'm well, thanks for asking. I'm not worried about stocks like AGL and SmartCentres because they're not "pink sheet" stocks strictly speaking. They're foreign listings that trade pink sheets in this country--though AGL is as an American Depositary Receipt. The main market for AGL is Australia, where it traded nearly 3 mil shares yesterday. For SmartCentres it's Toronto, where it typically trades close to a mil shares a day. That's where the liquidity is. And the price of the US listings is always going to track that in the home market. It may take time to fill an order depending on the broker you use. And you should make sure you're not paying more than my highest recommended entry points as well. But these are substantial companies that hold their value.

Bonnie

4:06

Roger, re: the OTC stock question I asked before on AGLXY and CWYUF, we need to put in limit orders. Does this impact your view on amounts allocated to these stocks?

Roger Conrad

4:06

Limit orders are a good idea. These stocks have been known to be misquoted. But again, if you get in below my highest recommended entry point, you're getting good value. My feeling is the more you want to allocate to these stocks, the more patient you'll have to be to fill out the full position--buying in increments to ensure you don't pay too much. And as I said earlier, I view AGL as a great speculation, but not really a conservative investment. But the fact these companies' home markets are elsewhere and they trade pink sheets here does not affect my assessment of their prospects as companies or investments. And eventually, being priced in and paying dividends in Australian dollars and Canadian dollars is going to be a positive for returns--as the energy cycle pushes these currencies up.

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