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8/27/24 Capitalist Times Live Chat
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AvatarElliott Gue
1:58
Good afternoon everyone and welcome. For those of you new to these monthly chats, it's a pure text-based system. Simply type in your questions and hit send, we'll answer all the questions we receive today. However, please note that these chats can be very busy, so it may take us a while to get to all of the questions received.
Let's start with some questions from the e-mail queue:
1:59
Q. Hi Roger. Do you have an opinion on Core and Main?—Sheldon C.
2:00
A. Hi Sheldon
 
I've been generally pretty wary of business development companies like Main Street Capital Corp for some time. First, in the current environment, higher for longer interest rates have tightened up capital markets and raised the bar for successful investment--meaning most BDCs have had to take on additional risk to earn their dividends. Second, my view has been that the risk is high that the Federal Reserve would not pivot to lower interest rates until there were real signs the economy is weakening--since that would likely happen before inflation returned to its benchmark of 2% or lower. And it appears that is the case, with Chairman Powell now apparently ready to pivot after the stock market event earlier this month and weakening employment data.
 
When the economy weakens, it's a near certainty some investments will sour, and the most at risk are those made when the economy was running faster and when higher for longer interest rates were ratcheting up the pressure to seek higher
(and riskier) returns. That's been the record of most BDCs in economic cycles. I think MAIN has probably managed its dividends better than most, but offering variable special cash payouts in good times rather than ramping up the core rate. But it hasn't escaped volatility. And after its run over the past year, I don't think the price is worth the risk.
 
The one exception to my BDC avoidance rule now is Hannon Armstrong Infrastructure Capital (NYSE: HASI). The reason is it dominates a fast growing niche--energy efficiency and behind the meter renewable energy projects that produce big energy cost savings and at this point enjoy generous, politically popular state and federal tax credits. Shares are up 20% plus so far this year but are still well below the highs of a few years ago--I think because there's a misperception the business depends on federal legislation. The numbers say otherwise--growth continues to accelerate, investment spreads are widening as cost of capital drops and credit quality is stronger
stronger than ever--with 100% of investments made to either investment grade corporations and governments with a very high probability of being paid off. The company is in other words not adding risk to grow. And the yield of 5% is growing 5-8% a year--with the primary spur customers' desire to cut their energy bills.
2:01
Q. Hi Roger, I hope you are well. Question - if NextEra Energy Partners (NYSE: NEP drops to $20 or so, and I can afford to buy more shares to bring my overall cost down to $25, would this be wise? I am currently at 250 shares with an average cost of $48. My expectations are that if the dividend yield is half what we see today, I’m comfortable with that. Best—Joe O.
A. Hi Joe. I never really recommend anyone really load up their portfolio on one stock, no matter how favorable I view the potential risk/reward.

With that caveat, I don’t think anything has changed here. NextEra Energy will back NextEra Energy Partners for as long as needed for NEP to become a viable funding option for them again. And if/when that occurs, NEP should be at least 50 plus.

I think it’s a show me story—buyers aren’t coming back so long as they’re concerned NEP will not able to refinance the CEPFs maturing in 2027 and later, and that NEE will lose patience. So I think we have to be patient. But NEE has at least a couple years to find solutions—as management stated in so many words in the Q2 earnings call.
Q. Thanks for the update. Roger-sure was a lot of activity in the utes this week. Good analysis re: Algonquin. I sold long ago. Going to take your advice and trim some Constellation. Going to trim a bit of ATO as well-it has been moving up strongly and my basis is ridiculously low-sold some loser muni CEFs so I'll be able to offset some Constellation/ATO LT gains. Going to pore over the latest issue of CUI for some redeployment ideas.
 
You have been spot on this year re: the entire ute space, especially your predictions for 2nd half gains. I see a possible Fed cut in September, which can only help the sector. I've been in the 0-1 rate cut camp all year-have moved to the 1-2 camp recently. Election may cause some uncertainty in Sept/Oct-my bet is on a divided government-let the dice roll. ---James G.
 
A. Thanks James. I think adding cash by taking money off the table in particularly run up names is a good idea. And the regular feature “Stocks Above Target” in Conrad’s Utility Investor’s Portfolio section is
my best advice for prices to consider taking a profit.
 
I do think the election is likely to have far less impact ultimately on investment returns than most expect at this point. And in fact, I would even go so far as to forecast the outcome to be pretty much status quo for utilities in most states. In any case, there’s plenty of reason to raise some additional cash in the high flyers, starting with the fact we might get a great correction before a great rotation.
2:02
Q. Roger: Quick question – I have bought CQP based upon your recommendations, but for the life of me I cannot find any reference to it in current or past issues of EIA. 
1.    Am I looking in the wrong publication? What am I missing?
2.    If you still recommend it, what are its (i) buy limit and (ii) dream price?—Barry J.
 
A. Hi Barry. We track Cheniere Energy Partners (NYSE: CQP) in the "MLPs and Midstream" coverage universe of Energy and Income Advisor. It's currently rated a buy up to 55. 
 
We last discussed back in March in EIA, in the Endangered Dividends List section. That concerned management's decision to reduce its dividend by roughly one-fourth to focus more cash on funding its robust permitted project pipeline--at a time when many would-be rivals were seeing their yet-to-be permitted projects put on hold. Management also promised to use more cash to buy back stock, which would further reduce outlays for dividends.
 
We considered it a good decision but reasoned that the stock would likely slump
for a while, once it sunk in to the public that the company was going to pay out less. And that's been the case since, though management did deliver an encouraging boost to guidance earlier this month, following the release of solid Q2 results. Distributable cash flow is now $3.1 to $3.5 bil, versus the previous 2024 projection of $2.9 to $3.4 bil, which should further boost the balance sheet going forward.
 
Shares did make a run to around $55 last month, before heading back under 50 again. We would look for the stock to eventually get back into the low 60s that it hit in November most recently. And more important, the business plan is on track--as the company widens its lead over rival developers in the race to secure new contracts for its LNG export facilities. But I think we're going to need to be patient for a full recovery--investors tend to be wary of buying stocks of companies after they cut dividends.
Q. Roger. I have an unfair question and I apologize in advance. Is there a non K-1 alternative to BSM as the idea runs afoul of IRA limits as to annual income and general distaste of K-1’s by recipients. I certainly understand if you wish to steer clear of the above. Best--Frank L.
 
A. Hi Frank. I think that's a fair question. I have generally attempted to avoid holding MLPs or any investment with alternative taxation in the CUI Plus/CT Income Portfolio, just to avoid the complexity.
 
I will say that I do own MLPs in my personal SEP IRA. And each year I receive two items at tax time. One is a Form K-1 for the MLP in question. The other is a statement from my broker to the effect that the unrelated business taxable income (UBTI) and other items do not meet the threshold for either additional tax filings or additional tax payments. In practice, you really have to own a lot of MLPs to hit $1,000 in portfolio wide UBTI.
 
As an alternative to Black Stone Minerals (NYSE: BSM), I'm afraid there's not a lot to
2:03
choose from for the stated objective I had making the swap from EQT--a purely dividend focused investment that will benefit from a recovery in natural gas prices--that doesn't have at least some degree of tax complexity. There are a number of oil and gas companies that now pay variable rate dividends and I recommended a number of them back in June for Energy and Income Advisor. None of them has as high a yield as BSM. But there's certainly the potential for big increases going forward. EOG Resources (NYSE: EOG) and Chesapeake Energy (NYSE: CHK) are two in the EIA Model Portfolio. If you're not an EIA subscriber and want to get a full look, give Sherry a call at 1-877-302-0749.
2:05
Q. There are numerous conflicts in this month’s newsletter (e.g., WPC headline “Buy 200" sh < 70 vs WPC end of paragraph “Buy 100 sh < 70”). There are at least four of these type errors, probably more.—James R.
 
A. Thank you James for pointing these errors out. We will do our best to make sure they don't reappear. The correct advice on W.P. Carey is to buy the full 100 share position at a price of 70 or lower. Please let me know what the others are and I will provide the correct information for you. Thanks again for your help.
Q. Dear Folks, Quite some time ago, I took a position in Williams Companies (NYSE: WMB), largely because you considered it to be a good conservative utility-like choice, although when I queried you about it, you did not believe that it had a tremendous amount of upside. Well, I am now up 90% on it, which is more than 11 times my annual dividend yield, which happens to be quite high. The current price is about 15% above your buy under target. Some time ago, you suggested that it is often a good idea to take profits when capital appreciation is more than 5 or 6 times the dividend yield. Just generally, do you think it is now time to take some money off the table on Williams, or is it a keeper, as you often opine about EPD? Many thanx—Jeffrey H.
 
A. Hi Jeffrey. Williams is a stock that certainly would match up well with the other midstream companies we have in the EIA Model Portfolio. And as you point out, we've been pretty consistently bullish on it as a long-term holding, even during the long energy downcycle
of the previous decade.
 
Williams trading in the mid-40s is in our view not a relative value. Not only is the price well above our highest recommended entry point of 38. But the yield is barely 4 percent, compared to for example peer Energy Transfer LP at nearly 8 percent with comparable sustainable growth rates. I think WMB gets the premium because it's a C-Corp rather than an MLP. But it's also expensive relative to Kinder Morgan--another peer with a comparable sustainable dividend growth rate and balance sheet.
I do think Williams is a "keeper" in this sector--as a large diversified company with assets in regions where natural gas transportation is increasingly tight. And gas midstream like the rest of the energy sector is decidedly underowned in the S&P 500--and by extension all related ETFs and the passive investment strategies that hold them, which is now a majority of money invested in the US stock market. We don't view it as a profit taking candidate yet. But neither would we chase it at the current price either. Look instead to the midstreams still trading under the highest recommended entry points in the model portfolio.
2:06
Q. Roger: BSM looks like a solid recommendation. Suggestion: When adding a new position that is a partnership (especially when the name of the entity does not so indicate), note that it is a partnership that generates a K-1. I can deal with K-1s but I actually bought some of this in my retirement account without doing any due diligence first. Since it is not appropriate for a retirement account, I will be selling it in that account. Regards, Bill W.
 
A. Thanks Bill. That's an issue I should have addressed in the recommendation and I apologize for the omission. As a rule of thumb, there is no tax due on MLP distributions received in an IRA or other tax deferred retirement account--so long as unrelated business taxable income (UBTI) does not exceed $1,000 on an overall portfolio basis. In practice, you have to own a very large number of MLPs to get total UBTI anywhere close to $1,000. So I haven't viewed it as a major concern.
For disclosure, I do own MLPs in my personal SEP. And each year, I receive two items. One is a Form K-1 for the MLP. The other is a statement from the broker to the effect the UBTI and other income does not meet the threshold needed for either a tax filing or a tax payment.
 
It's true you don't get the full tax advantages of owning a partnership within a tax deferred account--including return of capital. And for that reason, it makes sense for many people to hold them outside IRAs. But you also don't have the concern about paying a capital gains tax when you sell.
 
In any case, I do generally hold common stocks in the CUI Plus/CT Income, precisely to avoid this sort of complication for anyone. But in the case of Black Stone Minerals, the yield and upside were in my view worth the additional complexity.
2:07
Q. Dear Folks, Newmont Mining (NYSE: NEM) has breached the $50 mark. Might it be wise to take some money off the table for this stock, especially if one is overweight at a very much lower price? Or do you intend to keep riding NEM higher in a straight line? I know you have forecast a price close to $100. In the same way that you enter dream prices, have you thought of suggesting take-some-profit prices? Certain of your utility picks have really picked up steam lately. Many thanks, Jeffrey H.
 
 
A. Hi Jeffrey. We're not chasing Newmont above the highest recommended entry points--which for CUI Plus/CT Income is $50. But my view for a while is that the world's leading gold mining stock is ultimately heading to the century mark, as gold heats up with long-term global inflation pressure.
 
After Powell's comments last week, it certainly looks like the US will join other global central banks pivoting to a looser monetary policy to combat falling employment. That's given gold prices an additional shove over $2,500
an ounce. And Newmont shares have followed by rising over 50. But we're still a long way from the mid-2022 high of $86 plus. And the company is only beginning to realize the synergies from the Newcrest merger, driving down costs and pushing up output. 
 
I'm not raising the highest recommended entry point for Newmont at this time. But I think we've got a long ways to run before I'll be advising a sale. As for utilities surging, I would follow the advice in the my “Consider Taking Profits” column in the “Trading Above Target” table, which I publish in every issue of Conrad’s Utility Investor in the Portfolio section.
Q. Hello Roger, I have significant assets tied up in several money center banks BAC, MS, C, WFC. I was wondering if I should use those as a source of funds for other purchases at this time as interest rates are going to start dropping?--Sohel
 
A. Hi Sohel. Thanks for writing. Great question. And it's not just money center banks that have been rallying lately but regionals as well, like Arrow Financial (NSDQ: AROW) we hold in the CUI Plus/CT Income portfolio. That stock has now roughly doubled off its 52-week low it last year--in advance of expected stock and cash dividend increases expected to exceed 5%.
 
The big question going forward for financials--as well as other groups like utilities and even energy--is if the market's next phase is a great rotation or a great correction. If it's a continuing rotation from Big Tech, then financials will go a lot higher. If it's a correction, then they're likely to go lower before that happens. I think a lot depends on what the Fed does in terms of lower interest rates
But a pivot is bullish for financials over the next 12-18 months in any case, as it is for utilities and other sectors. 
 
Our view is the best course is to build positions in top quality stocks of multiple industries that are not Big Tech--and so will hold up in a correction but benefit from a rotation. And that's how we're positioning all of our Capitalist Times advisories. Hope this answers your question and that you'll join us for the chat tomorrow.
Q. Roger. NextEra Energy Partners appears to be accelerating to the downside and I am considering adding more to my 3600 shares. But I need your thoughts first if different from your recent CUI comments. I tend to believe managment projections of 15% dividend growth for the next 3 years because NEE managment has met and exceeded Wall Streets expectations for many years now. Since its the same management team, I don’t think they will soil their reputation by making NEP projections that they cannot live up to moving forward. But obviously the Street isn’t buying it. Thoughts? Best Regards.—Gary J.
 
A. Hi Gary. Generally, I don't advise anyone really loading up on one particular position, no matter how much I like it. There's no such thing as perfect knowledge. And in the case of NextEra Energy Partners (NYSE: NEP), there's no shortage right now of high yielding renewable energy companies that are currently unloved and therefore selling cheaply--Brookfield Renewable (TSX: BEP-U/BEPC, NYSE: BEP/BEPC),
2:08
Clearway Energy (NYSE: CWEN) and Hannon Armstrong (NYSE: HASI) to name three.
 
That said, I do still believe that NextEra Energy (NYSE: NEE) will stand by its yieldco affiliate (NEP) until it again becomes a suitable financing vehicle for what are still very aggressive funding plans going forward. And it certainly can afford to give the additional support--for one thing NEP's market capitalization is less than $2.5 billion (including what NEE owns) and NEE's market cap is north of $165 bil. 
 
The key issue is when NEP is again able to access capital markets on economic terms. And it literally has until 2027 to make it back, which is when the remaining convertible equity finance starts to mature. I don't blame investors/analysts for being wary of NEP until something concrete is announced. It's certainly possible NEE will give up and either cut the dividend, buy back the publicly owned shares of NEP on the cheap or both.
And so long as it is, the share price will likely remain too depressed for equity finance for the time being. 
 
Where I part company with much of the opinion on this stock is I think the strong probability is NEE/NEP does get something done--very likely using the "mixed securities shelf" just filed with the SEC. And if that happens, the financial pressure will suddenly be off NEP and the next question will be what drop downs it takes from NextEra Energy Resources' overflowing stockpile. I would then look for this stock to move quite a bit higher in a hurry--just as NextEra Energy shares have done since early March--going from 55 to 80 plus. 
 
That's why I still recommend sticking with your NEP. But again, so far as new positions go, I never recommend really loading up on a single stock.
Q. Roger--On 6/17/24 both a “special dividend” and a “cash dividend” showed up on my brokerage statement for Algonquin Power & Utilities (TSX: AQN, NYSE: AQN). The commensurate “foreign tax paid” looked to be approximately 25%. With that big of a bite taken out, do you still rate Algonquin a hold? Thank you.--John A.
 
 
A. Hi John. Thanks for writing. There is 15% withholding tax on dividends paid by Canadian companies to US investors. It can be recovered as a credit on your US taxes. The 25% you've been withheld is also recoverable. But the rate is too high and is the result of your broker taking out too much.
 
I still rate Algonquin a hold. The reason for the recommendation--even after the dividend cut earlier this month--is that every regulated utility in history has eventually been able to recover from whatever stumbles companies have made. The cut was something of a surprise and indicates the recovery will take longer than I had anticipated. But as I pointed out in the update, the sale of the renewable
2:09
energy assets went off at a higher than expected price, which means faster debt reduction. Management really laid out a cautious view for the regulated utility operation, citing "regulatory lag." And until there's more progress, I'm not inclined to advise anyone to buy more. But as PG&E Corp hitting a 5-year plus high this week demonstrates, the utility industry has a unique ability to recover from any disaster. And at a price of $5 and change, we're not taking a lot of risk sticking with AQN the next 12 months or so to see how things pan out.
Q. Hi Roger. Can you please provide an opinion on PBF? It is a relatively small refiner with a market cap under $4 billion. Kind regards.—Jim C.
 
A. Hi Jim. Margins for small refiners especially have been under pressure this summer globally. But PBF's Q2 shortfall was due to what management has acknowledged as poor facility maintenance practices, for example a three-week extension of facility maintenance this summer due to uncovered issues with the catalytic cracker at a major refinery in Delaware City. The outages caused the company to largely miss out on what's usually been its seasonally strongest time of year. Total throughput was lower by -1.6% from a year ago and combined with crack spreads and other pricing that declined "as the quarter progressed," the result was a loss of 56 cents per share on -4.6% lower revenue, with debt interest expense net of interest income rising 25.4% from the year ago quarter.
Management in the Q2 earnings forecast fewer maintenance outages in the second half of the year as "we have completed the majority of our planned maintenance for the year." And it affirmed the pace of recent share buybacks, which had been driving the stock price earlier in the year. That's good reason to expect the stock is reaching a bottom here in the low 30s--barring a major market event. But in the refining space, we don't see much reach to buy anything outside of Model Portfolio pick Valero Energy--which in contrast to PBF posted very solid Q2 results.
Q. Roger. I just reread the August issue a couple of times looking for the EQT (NYSE: EQT) sale recommendation and the replacement higher-yielding mineral stock you suggested. Alas, I couldn’t find it. I hope I didn’t dream that. If I didn’t, could you please shoot me the name of the mineral stock with the higher yield. I’m de-risking my overall portfolio and when I initially read that idea it seemed like that sale/purchase fit that strategy. Thanks much.—Gary S.
 
A. Hi Gary. Yes, I recommended swapping the CUI Plus/CT Income position in EQT for Black Stone Minerals LP (NYSE: BSM) this month. But we did not make that recommendation in Energy and Income Advisor.
 
The rationale for the change in CUI Plus/CT Income is BSM pays a quarterly dividend of 37.5 cents per share, which equates to a yield north of 10%. Management has also pledged to restore the old rate of 47.5 cents when conditions permit. BSM is a royalty trust and so is structured to pay out substantially all of its earnings in dividends.
2:10
It also has the advantage of zero debt and steadily rising output from its lands, as it has been making acquisitions in the Gulf Coast region that tie into export markets.
 
EQT is a very strong natural gas focused producer and remains a recommendation in Energy and Income Advisor. We expect to see a price north of $50 (currently low 30s) on a recovery of natural gas prices in the next 12 to 18 months. And the price history of the stock indicates the move will be quite fast when it starts. But Black Stone's high yield means it fits better with the income objective of this portfolio, hence the switch. Remember, we acquired the EQT shares when that company merged with its former affiliate Equitrans Midstream--which did have a high yield. But my objective following the deal was always to switch into something with a higher yield.
Is Black Stone lower risk than EQT? I think they're both actually pretty aggressive investments. BSM's dividend will move up and down with natural gas prices. And while EQT's low dividend would very likely hold come what may, its share price will certainly move with gas. Essentially, I think the way to view both stocks as simply different ways to bet on a recovery in natural gas prices. If cutting risk is the specific objective, I would recommend one of our midstream companies or a super oil like ExxonMobil (when it trades at a lower price).
Jeff B.
2:19
You have touted two bond funds FLBL and TLTW. What happens to the fund price if interest rates go up or down and then in either case what happens to the distributions?

If rates go down wouldn't the distribution rate go down and the fund price go up and vice versa?
AvatarElliott Gue
2:19
FLBL isn't really a bond fund, but an ETF that owns a portfolio of bank loans. Bank loans carry floating interest rates. For example, a company might borrow money from a bank at a rate of 3-month T-Bills +250 basis points (2.50%) with a floor at 4%. Typically the interest rate charged "resets" periodically -- on average about every 60 days in FLBL's portfolio. So, FLBL's distributions will tend to rise when interest rates rise -- this is also why FLBL and other floating rate loan ETFs outperformed the rest of the bond market in 2023 and early 2024 -- rising rates is generally bullish for loans.

TLTW is an ETF that owns units of the iShares 20+ Year Treasury ETF (TLT),
AvatarElliott Gue
2:19
which tracks long-term US Treasury Bonds. In addition TLTW also sells call options -- covered calls -- to enhance premium income. So, it's kind of a unique proposition in the bond ETF world. I published a detailed longer piece on TLTW over on my Smart Bonds Substack that's free to view right here: https://open.substack.com/pub/smartbonds/p/double-digit-yield-trap-or-...
2:22
The long and short of it is that a rally in Treasury (government bond prices) will push up the price of TLT. Your annualized yield in TLT will fall when bond prices rally (rising prices = falling yields in the fixed income world). TLTW it depends on a number of other factors.
Denis H.
2:28
Elliot & Roger:

A general question for you wizards. Knowing that you have a crystal ball in the bottom drawer of your offices, I'd like to ask for an educated prediction. The last energy peak was in, what 2015? I agree that we seem to be in the early stages of the present one. As informed observers of the energy patch, when do you think the current peak will come - ish? Thx.

Nostradamus follower
AvatarElliott Gue
2:28
Maybe I need new contacts because that crystal ball is a little cloudy, especially when looking far in the future. However, let me offer this as a rough outline of what to expect. . Supercycles in energy can last 10+ years. For example, I'd say the last big supercycle started in the late 1990s and ended in 2014 -- we'll call that 15 years. You could also make an argument that the last supercycle started in 1998 and ended in 2008, 10 years on that definition. Given that the current supercycle started in 2020, I think the early 2030s is a decent (hopefully educated) guess. I would say that in prior supercycles, energy producers started investing in developing new supply earlier than in the current cycle -- if anything that will likely prolong the price increases and lengthen the cycle.
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