JotCast | 6/29/23 Capitalist Times Live Chat

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6/29/23 Capitalist Times Live Chat

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Roger Conrad

1:57

Hello everyone and welcome to this month's live webchat for our Capitalist Times members. As always, there is no audio. Just type in your questions and we'll get to them as soon as we can comprehensively and concisely. We will publish a transcript of the complete Q&A after the conclusion of the chat, which will be when there are no longer questions left in the queue, or from emails we received prior to the chat. Thanks again for being a CT member. We look forward to fielding your questions today.

2:00

Here's one we received prior to the chat: Should a downturn occur in the equity markets consistent with recession, I wish to
invest in a speciality REIT related to cell towers. CCI and AMT are basically in the same
business. In your opinion, which one of these two has the better fundamentals and
would be worthy of fresh money ?

JOHN R.

2:03

John. Of the two, I prefer Crown Castle (NYSE: CCI) to American Tower (NYSE: AMT), mainly because the story is more straightforward with only US assets. AMT earnings are frequently disrupted by currency volatility and it's also subject to more erratic regulation. AMT also has data centers, operations of which is a much more competitive business than telecom infrastructure. CCI and AMT are seeing some pressure on earnings this year from T-Mobile US' consolidation of Sprint. But dividends for both companies are well covered and still growing.

2:05

As an added note, data centers have been touted as beneficiaries of a coming AI boom. They would have to be. But data centers' ability to boost profitability will depend on being able to economically fund a massive change from CPUs to GPUs capable of supporting AI. And that's not even a given for the biggest names. Plus the shares are already pricing in a lot. See this month's REIT Sheet for more on data center REITs.

Daniel N

2:12

Hi Roger- BEP recently announced the acquisition of Duke's non-regulated renewables business. I've seen seemingly conflicting commentary, would appreciate your opinion... BEP's purchase price reportedly valued the DUK renewables business at a P/E under 10, which in the estimates of a couple analysts was a good price for BEP, probably well below what DUK had hoped for.

So quandry in analyst comments is:

1. Good deal for BEP as standalone transaction...
2. ...but low valuation indicates ALL unregulated renewables businesses should have their valuations lowered.

What do you think? Good and/or smart deal for BEP? Is the purchase price surprisingly low, indicative of relative weakness in unregulated renewables generation? Or maybe it just indicates higher cost of capital inhibited competitive bidding on an acquisition?

Thanks

Roger Conrad

2:12

Hi Daniel. I think what's happening in non-regulated renewables is a realization among players that you need a lot of scale to be viable and profitable long-term, just as has been the case for wholesale power producers overall since the 1990s. And regulated utilities like Consolidated Edison (to RWE) and now Duke Energy (to Brookfield) can more reliably add to earnings by investing in rate based renewable energy. I think BEP is now positioned to be a long-term unregulated renewables player as are NextEra, RWE, Iberdrola and Enel. Others like Dominion Energy (NYSE: D) are likely to sell their unregulated renewables, as the cash can be best put to work in rate base investment. So good deal for Brookfield as it adds scale at a low price--good for Duke as well despite having to write down the book value before selling.

Elliott Gue

2:19

result in a drawdown in bank reserves. In effect, government borrowing pulls money from the private sector, which tends to act as a brake on the US economy.

Wayne H.

2:19

Interesting quote from economist Daniel Lacalle in his article ( Crowding Out: The Fed May Be Killing the Private Sector to Save the Government) published on May 20, 2023:

“Fighting inflation without cutting government spending is like dieting without eliminating fattening foods.”

Basically the article discusses the premise that the current method of raising interest rates to reduce inflation without significant, if any, cuts in government spending forces the private sector to absorb the entire cost of that method and ensures a recession.
Any thoughts on applicability to our near or longer term investment strategy?

Thanks

Elliott Gue

2:19

Thanks for the question. Yes, I think there's some truth to that. I recently wrote a piece over on my Substack (actually I think there were two articles) regarding the interplay between the Treasury General Account (TGA), the Fed's balance sheet and bank reserves.

The TGA is basically the US government's "checking" account at the Fed and it was depleted amid the debt ceiling standoff earlier this year. Sicne early June, following the deal on the debt ceiling, the Treasury has borrowed money at a furious pace in an effort to replenish the TGA to a more comfortable level.

Issuing bonds -- taking on government debt -- sooner or later sucks money out of the rest of the economy. Because the US government has focused on short-term debt (T-bills) to date, some of the money they're borrowing is from money market accounts (money market accounts can buy short-term government debt). Longer term, however, some of it will probably have to come in the form of longer -term Treasury Bond issuance, which will tend to

Elliott Gue

2:20

Looks like I posted the last few sentences of that answer before the question ... I apologize.

Daniel N

2:28

Hi Roger- AQN just had their annual meeting, and the market looks to have been... unimpressed? Takeaways? Were there any meaningful updates on the strategic review for asset sales etc?

It's hard not to notice that the share price of AY also has suffered in the past couple weeks, perhaps again because investors are hoping for clarity on strategic reviews for both AQN and AY.

Related to my previous question about the BEP purchase of DUK renewable assets, is it perhaps just another indication that capital costs are inhibiting bidding for acquisitions? As a shareholder in both companies, I would rather wait (and get paid to wait) than have management accept lowball offers for assets.

Thanks

Roger Conrad

2:28

It's fair to say that given the economic uncertainty, the market is discounting stocks of companies where there's business uncertainty a good bit more than usual. I think that ultimately means a bigger payoff for us being patient now with Algonquin, Atlantica, Dominion Energy etc--as they decide what they're going to do with strategic reviews. But you're right AQN/AY didn't really have any specifics for investors this month, though credit rater S&P did issue an opinion that the review could be "credit positive." That's been more disappointing for Atlantica, as investors are anticipating AQN selling its ownership to a more interested sponsor.
Like you, I'd rather these companies hold onto assets than low ball sales. And that may mean rather quiet outcomes near-term, with capital costs a factor.

Roger Conrad

2:31

Adding to that, we'll see earnings for AQN and AY in early August, as well as Dominion. By then, they should have a pretty good idea of what they're going to do and I think we will see asset sales. But for now, I think we should just be patient.

JOHNNY

2:32

I previously submitted this question, but it was returned. If you received it, please disregard this submission.

Should a downturn occur in the equity markets consistent with recession, I wish to invest in a speciality REIT related to cell towers. CCI and AMT are basically in the same business. In your opinion, which one of these two has the better fundamentals and would be worthy of fresh money ?

Roger Conrad

2:32

Hi Johnny, yours was the first question I answered in the chat. Briefly, I prefer CCI for the reasons mentioned. The shares also look pretty cheap in their own right, with a yield north of 5.5%. I have featured in the REIT Sheet, the latest edition posting earlier this week.

Barry

2:45

Roger:
If a stock (like AQN) has an ex-dividend date of 6/29/23, when may I sell the stock and still be entitled to the current dividend? 6/29? 6/30?
Thanks.

Roger Conrad

2:45

Hi Barry. Shareholders who own on the "record date" are entitled to declared dividends, even if they sell before the payable date--which is when the money should show up in your account. In the case of Algonquin, the next dividend payable date is July 14 to shareholders of record June 30--so that's the date you'd need to be a shareholder to receive the dividend.

Don

2:53

Hi Roger,

Thank you for doing these chats. I have a few questions:

CWCO has made quite a run. Have you raised your price target or would you recommend taking some profits at this level.

Looking to deploy some fresh money in new names. AEP, ES and UGI are at or near their lows. Thoughts on entries here.

Happy 4th to you, your staff and families.

Roger Conrad

2:53

Hi Don. Happy 4th to you!! Consolidated Water was one of my "top picks" for 2023 in Conrad's Utility Investor, so I'll be updating it in the July issue posting on the 10th. This is a winner from the pick up in infrastructure investing that took a long time for investors to notice. It's a bit above my highest recommended entry point, the latest upside catalyst being the award of a $204 mil contract in Hawaii. So it's officially a hold for now--but I anticipate either raise the entry point or recommend taking partial profit in a couple weeks. As for fresh money, American Electric Power and EverSource are in my view solid buys--I have owned ES for several decades. I think AEP is taking a hit now on concerns about future wind investment in Texas and ES has come down on concern about what it will sell its offshore wind ownership for. But both are very solid. UGI is a bit riskier as it tries to exit European fuel distribution, indicated by the 2023 guidance cut, the negative impact of mild weather at Amerigas

Roger Conrad

2:55

continuing with UGI--and the high cost of recently issued debt. Unlike AEP and ES, there are substantial unregulated operations at UGI. I think the stock is cheap at 8.6X next 12 months earnings (expected). But I want to see FYQ3 results (early August) before recommending anyone buy it.

3:01

Hi guys thanks for having this chat. I would like to have commodity exposure outside the US and am thinking of buying WDS and BHP. Are the dividends safe? Do you see any problems with them if we have a recession? Your thoughts? Thank you.

Roger Conrad

3:01

Hi JP. Dividends at both BHP Group (ASX: BHP, NYSE: BHP) and Woodside Energy (ASX: WDS, NYSE: WDS) are paid at a variable rate linked to earnings. In BHP's case, those earnings are closely tied to selling prices for iron ore, copper, nickel, metallurgical coal and other key minerals and metals. For Woodside, they're tied to oil and gas prices, particularly LNG. Both are solid companies that should benefit from what we believe is a long-term energy/commodity upcycle. But selling prices for their output are lower than a year ago, so you should expect dividends to also be lower when they declare them next--which should be around August 31 for WDS and August 21 for BHP. I do think both stocks are already priced for a lower dividend in anticipation of a global slowdown/recession--so downside to their prices from here should be limited in the near term. And as I said, I think both dividends and share prices will go much higher when the Fed declares victory over inflation and the upcycle resumes.

BKNC

3:13

Hi Roger, Some of the dividend related stocks have been getting hit as everyone is looking at AI. I like to add to positions of good companies when the market throws them away (even if I have full positions). Stocks of interest now are KHC (not sure why it is going down), The medical stocks CVS and ABBV and last NEM. I am wonder what your thoughts are adding to these?

Roger Conrad

3:13

Pretty much everything not associated with AI and Big Tech has been generally trending lower in recent weeks--and even best in class dividend stocks haven't been spared. Investors continue to hold a lot of cash but many want to keep a toe in the stock market by sticking with what's still going up. This has happened in the past and it hasn't ended well for the stocks getting bid up. The silver lining is stocks like Kraft Heinz and CVS are now quite cheap on a valuation basis. And even Abbvie is about as cheap as it's been in many months. Newmont is a different story as a gold mining stock and with a major acquisition in progress. But bottom line is so long as these companies stay strong on the inside--as Q1 results, guidance and subsequent events indicate--downside from a Big Tech crash is limited, upside from an eventual return to favor is huge and dividends are high and safe in the meantime. As for adding to these holdings and others in CUI Plus/CT Income, the approach I'm taking now is to move slowly.

Hans

3:24

Roger, In a Wallstreet Journal article it mentioned that "turbine components are degrading faster than expected", does this affect any of the Clean Energy stocks. Thanks

Roger Conrad

3:24

Hi Hans. I believe the specific case is a Siemens Energy AG announcement that it has found an "abnormal vibration" in testing certain components. Bloomberg News reports a "main piece" on the "turbine frame can move or twist over time, potentially damaging other critical parts" and it put a price tag of $1.1 bil for a fix. That will pressure Siemens' margins but won't bankrupt it, and its customers should be held harmless. I do think this case points out the immense challenge of rolling out a lot of power generation capacity at the same time--regardless of source. I think it's yet another problem for offshore wind, where you have the added problem of corrosion from seawater etc. I think it's a reason to stick with adopters rather than manufacturers generally. And I think it will likely be another factor inducing adopters to choose solar over wind. I don't see it as a threat to margins of any stocks we own, though this will be something to explore with Q2 results and guidance over the next month or so.

Elliott Gue

3:24

see recession ahead, I believe oil prices have already largely priced in such a slowdown. But, I think that's why SLB has been largely rangebound this year, just like oil. It's essentially a psycological read-across from oil.

James

3:24

Hi Elliott, can you give me your analysis of SLB stock price action and where you see it going in the 2nd half of the year? On the business side, do you see slowing overseas service business in the 2nd half of the year or a ramp up?

Elliott Gue

3:24

From a business perspective, I don't think you're going to see much of a slowdown in international demand for oil and gas services.

For the most part, these projects are driven by long-term commodity price assumptions and so the pullback in oil prices from last summer's peak won't have an impact on investment decisions. If anything, I suspect the international cycle will ramp up into 2024 because it's driven by countries in places like the Middle East that wish to ramp up their oil production capacity for strategic reasons.

In the short-to-intermediate term, however, the trends in SLB's stock can deviate from the underlying fundamentals. Right now, for example, investors appear concerned that a US recession, and a major slowdown in China, could put pressure on oil prices.

That's why, oil continues to test the bottom of its range despite Saudi/OPEC ongoing efforts to tighten the supply side of the equation.

To be clear, I don't see a lot of downside risk for oil from the current level. And, while I do

Victor

3:29

Hello Elliott, As of May 25th the Actively Managed Portfolio had an allocation of approximately 6.65% of HESM and allocation of 4.60% for EPD. HESM is an aggressive play while EPD is a conservative position. What is the criteria when deciding on allocation percentages? SLB has the highest allocation of 7.37% of the entire portfolio, are you putting more weight on SLB predicting a higher move? I’m just curious to know how what the decision making is when it comes to portfolio allocation. Thanks.

Elliott Gue

3:29

Thanks for the question. The allocations are based on a number of criteria including our fundamental outlook for the stock and sub-sector and the volatility/risk inherent in the stock.

SLB is among our favorite names. I also think one reason the allocation is so large is that we wish to have a sizable allocation to the services space and SLB is one of the only names that has limited exposure to what we believe could be a weakening US drilling/services market.

As I wrote in response to a question earlier, SLB looks range-bound near term because the weakness in oil prices is dominating the narrative despite ongoing improvement in underlying fundamentals.

Over the intermediate to long-term, SLB is one of the bets positioned stocks in our coverage universe because it's a beneficiary of a multi-year surge in spending that's needed to align global oil supply and demand.

Alex M

3:32

Hi Roger. A quick request for the utility newsletter: In the report card, could you please distinguish between traditional utilities with generation capabilities versus the transmission/distribution utilities? I see you've got the "regulated utility" category, but as you've noted before, the pure-play transmission utilities have a lower risk profile than many of their peers with power generation functions. That said, do you have a favorite few pure-play transmission utility stocks? Thank you.

Roger Conrad

3:32

Hi Alex. That's a helpful suggestion, thanks. I do have a column for business description I've been dissatisfied with for a while and putting in a few new distinctions is a good idea. Look for it with the July Utility Report Card. Edison International (NYSE: EIX) is a pure T&D company I featured as the Conservative focus stock in the June issue. Another one in the portfolio is Exelon Corp (NYSE: EXC), which is actually the largest US T&D utility. First Energy Corp (NYSE: FE) is another, though it's still better suited for aggressive investors. One rule of thumb is pure T&D utilities are located only in the 15 states and District of Columbia that deregulated generation and marketing in the 1990s. The rest are still regulated vertical monopolies, just as they've been since the late 1800s.

Victor

3:33

Hi Elliott, SHEL is higher than a year ago but it seems that it’s hitting resistant close to $60. Would you sell it at this level?

Elliott Gue

3:33

I think SHEL is OK longer term but it just doesn't have the production growth potential of its US peers, particularly XOM.

What's a little disappointing about the European majors is that they didn't invest more in new projects amid the downturn (the downward phase of the commodity cycle). This has left them short of growth at just the moment that they could use it most.

Last we rated SHEL I think we had it rated a Hold and we'd prefer XOM, particularly on dips. Another name we added to the portfolio a while back that's in a better buy position right now is HES, which is a partner with XOM on its project in Guyana.

Victor

3:38

Elliott, you mentioned in the last EIA issue that the MVP project should benefit CHK. Overall you seem to be bullish on gas production. CHK it’s been in an uptrend for several months. Are you suggesting to add more to an existing position at the current levels?

Elliott Gue

3:38

One of the Big 4 investment themes we outlined in the early June issue is that we think there's more upside in natural gas levered producers right now than in oil.

The oil market is obsessed with the potential for a recession right now ands a big slowdown in China demand. I don't see much downside for oil, and I think we may see a tightening in supply/demand later this year, but these forces are keeping a lid on oil right now.

Gas, however, was priced for a disaster earlier this year and that's way, way overdone. We calculated our fair value estimates for our two pure-play gas names -- EQT and CHK -- based on just the current gas curve (not projecting any big rally in gas) and we still see upside of 50% to 70% in these names.

We actually have more on gas in the next issue of EIA coming out soon but the gist of it is that the outlook for gas-levered names in the short-to-intermediate term is more bullish.

Victor

3:39

Elliott. I have a decent position on FANG that I held for a long time. I know that you recommend PXD which I don’t own. Would you say that either one is good to hold?

Elliott Gue

3:39

FANG and PXD are, quite honestly, similar companies in many ways. I think it has been a few months since I did a more detailed valuation on FANG, but I'd say it and PXD are similarly valued relative to their cash flow potential.

Victor

3:44

Hello guys and thank you for this service. Roger, CVX has been in a downtrend for the last 7 or 8 months. I know that lower oil prices impacted the entire sector. However, XOM held much better than CVX. Is there any specific reason for this? Do you see some support at the current levels or do you think that this downtrend will continue?

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