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9/27/22 Capitalist Times Live Chat

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Roger Conrad

3:16

Altria has actually held up fairly decently in this latest phase of the 2022 stock market selloff. The damage to the stock came back in June--that's when the value of its investment in Juul evaporated overnight as US regulators decided to ban its e-cigarettes. The Juul writedown affected headline earnings. But it did not affect the company's ability to meet its adjusted earnings guidance--which is the metric that sets the dividend as it does not include one-time, non-cash items. And that's why the company was able to raise the quarterly dividend to 94 cents from 90 cents effective with the October payment.

There's been some speculation that Altria might be able to salvage its Juul investment. But I think investors are best off just thinking of this as a defensive stock offering great income and backed by a very strong balance sheet (A3, stable outlook by Moody's). Some ESG investors will have trouble owning a cigarette company--another reason to expect a low valuation.

Elliott Gue

3:21

their next quarterly call will be a potential upside catalyst as they move past that headwind.

Jeffrey H

3:25

CHAT QUERY: AQN, AQNU, AES, AESC
Dear Folks, First a Macro question -- do you think that surges upward in the S and P 500 will result from short squeezes or from genuine investor optimism? And no matter what the answer, do you think it is time to nibble on stocks like AQN and AES?

Are AQNU and AESC better plays for these two stocks or are the risks and outcomes the same? Thank you

Roger Conrad

3:25

Hi Jeffrey. I'm pretty certain many of today's short sellers will wind up getting squeezed by hanging around too long in companies that stay strong on the inside. AES and Algonquin aren't being particularly heavily shorted just now, though that could change depending on how long and how deeply stocks sell off. The important thing though is neither has seen its prospects diminish this year--in fact, arguably they've been enhanced and in fact could see a major benefit if Senator Manchin's permit reform bill passes this week. I do think both stocks are in a good buying range now--Algonquin being below its Dream Buy price. They could fall further given the macro environment, which is why it makes sense to invest incrementally. But I do think they'll be at meaningfully higher prices in the next 2 to 3 years than now. The convertible preferreds have the advantage of paying bigger dividends than the underlying common stocks--though their returns will mirror them.

Jeffrey H

3:35

Hello Again, and thank you again for these chats -- I find them extremely valuable, especially in these anxious times. Is it too soon to buy oil/gas producers like PDX and CHK? Or do you see them dropping a lot more? I have the same question for Midstreams like ET and MPLX. And if you were to choose among producers and midstreams, would these four be high on your list -- or would you select others for an income investor who is also interested in price appreciation?

Roger Conrad

3:35

And thank you for your always good questions. Elliott has a good deal to say on the macro situation in the issue of EIA that's going to post this week. My focus is on dividend safety--and I run through all of the Model Portfolio and High Yield Energy companies to assess risk from a variety of angles.

As you've probably gathered from our answers today, we believe risk of a recession is very high and that's historically meant more selling of energy stocks. But on the other hand, in stark contrast to the previous decade, we are in an energy upcycle, with supply and investment lagging demand. And when that's been the case historically, the energy sector has generally fallen least and recovered first. Certainly our recommendations could get cheaper. But we're very comfortable sticking with those 4 companies and adding incrementally.

Jeffrey H

3:41

Finally, I have a question about buying Canadian stocks right now such as PEYUF, VET, PBA, and TRP.

This is a lot of questions. But please answer what you have time for.

Many thanks

Roger Conrad

3:41

Pembina and TC Energy both increased dividends consistently during the energy downcycle that lasted from late 2014 though mid-2020. They've continued to build their business and strengthen balance sheets--so they're in great shape to continue doing so. And after the Canadian dollar and market selloff, they're also pretty cheap.

The producers Peyto and Vermilion are both tracked in our Canada and Australia coverage universe on the EIA website. They did cut dividends during the downturn to hold in cash. And they are directly impacted by oil and gas price volatility. But they also strengthened themselves by cutting costs and debt in recent years, while continuing to pursue prime development--Vermilion in Europe, where it now has a very hungry market. Expect more downside in a recession but for both to prove resilient and lead a recovery.

Victor

3:43

Hello guys and thank you for this service and your input on the economy and the energy industry.
Today’s headline: “Oil climbs from lowest since January with Dollar’s rally paused”. Is the strong dollar so significant in the price of oil? And, when you look at the massive US debt, do you see a weaking Dollar at some point?

Elliott Gue

3:43

The dollar really has very little to do with oil prices. At risk of sounding sarcastic, in my experience it's something analysts say when they can't come up with a better explanation for moves in oil. A perfect example is this year -- the US dollar index is up 19.4% so far this year and is trading at the highest levels in more than 2 decades; yet, oil prices are higher this year. Another example: the dollar index hit a low at about 2 AM New York Time and has rallied sharply since midday. Yet, oil is also still up. We've put together a more detailed outlook for oil in the issue that's coming out shortly but to summarize: We think the selling pressure in oil is entirely a function of the slowing economy, rising fears of recession. In fact, we're starting to see declining US demand since roughly midsummer despite as decline in retail gasoline prices. That's likely a good signal of the slowing economy too. At the same time, the supply side remains very, very bullish. If it weren't for the US draining the SPR

Elliott Gue

3:43

at (by far) the fastest pace in history this summer and back to 1985-86 levels, then US commercial oil inventories would have plummeted all summer long. SPR releases are slated to wind down next month. The Saudis also appear to be seeking to put a floor under oil somewhere in the $70 - $80 range (WTI). So, downside risk for oil looks contained. Energy stocks would fall alongside the rest of the market, but we see a lot of great buying opportunities over the next two months as they're likely to be a key leadership group in the next bull market. Finally, I do see the dollar weakening at some point, as the market comes to grips with a likely US recession and the fact that the Fed's hiking cycle will end. Also, the yen historically sees a major rally when there's a global "crisis" as Japanese investors repatriate their enormous domestic savings.

Buddy

3:46

Elliott, What are your two favorite Natural Gas plays for a cold winter here and in Europe? Thanks

Elliott Gue

3:46

The two names I'd highlight in the portfolio are EOG and CHK. EOG is diversified but has some hefty gas exposure and a good yield when you factor in all the special dividends on top of their regular payout. CHK a much purer play on gas, a bit more volatile but also an attractive yield. These are both US plays which benefit (somewhat) from what's happening in Europe as LNG exports help keep a floor under US gas prices.

Teresa P.

3:53

Hi Roger,

Is there any way to determine what percentage of income is paid to a reit in foreign currency? With the strong dollar I'm wondering about Digital Realty and Realty Income specifically. Thank you.

Roger Conrad

3:53

Hi Teresa. Good question. Digital Realty has cash generating properties all over the world at this point. To date, the REIT has been able to manage its way through what management called during the Q2 earnings call "stiff FX headwinds," recording double-digit growth even after exchange rate impacts. Obviously the more it expands outside the US, the more challenging this will be, though at some point the dollar is likely to back off and the foreign exposure will be a plus. In Q2, 57% of revenue was denominated in US dollars, 22% in Euros, 7% Singapore dollars, 6% British pounds and 2% Japanese yen.

Realty Income has operations in the UK (pounds) and Spain (Euros). But the vast majority of the business is in the US--which is where 289 of its first half 2022 acquisitions were versus 51 in Europe. It's also done a good job matching revenues and expenses in currencies of countries where it operates, a natural hedge. Bottom line: Currency is not as much of a risk.

Harvey F.

4:00

Considering purchasing Preferred stocks such as those offered by Brooksfield Property Partners or others, which are trading below par ($25.oo) and are callable in two to four years.
Are there any risks (other than the unlikely bankruptcy of the company ) which I should consider - otherwise I just collect the posted quarterly payout.

Roger Conrad

4:00

Hi Harvey. I don't rate the odds of a bankruptcy at Brookfield Property Partners very high--they are extremely diversified by operations, draw a BBB+ credit rating (stable outlook) from S&P and are backed by Brookfield Asset Management. Rather, the risk would be to principal from rising interest rates--the company's six preferreds can be called but do not mature, so they can fall a lot in a rising rate environment and the payout will never be increased either. The 5.125% currently sells for $16.61 off a par value of $25, which equates to a 7.7% yield. But I'd rather own Energy Transfer LP--which yields 8.8% and is likely to have a rising dividend the next several years.

Victor

4:02

Hi Elliott,
Your prediction of the SP-500 dropping below 3700 came true. Do you still think that we are heading towards 3000 or lower? When you look at the current drop in energy stocks, and considering their current multiples, will energy stocks be impacted the same way as the rest of the market?

Elliott Gue

4:02

I know I must sound a bit like the angel of doom on these chats lately, but I remain bearish on the S&P 500 and US equity markets generally. We can disaggregate the price of the stock market into two fundamentals -- earnings and a multiple. For example, right now, the S&P is trading around 3,650 and it's expected to generate about $230 per index unit over the next 12 months for a multiple of about 15.8. All that's changed this year is the multiple, earnings estimates have only come down slightly since their summer peak. Earnings multiples are inversely correlated to interest rates, so the selling we've seen thus far is entirely due to multiple compression. That's why "growthy" sectors like tech/nasdaq have been hit harder -- multiples for these growth sectors are more sensitive to rates. Because energy is so much cheaper than the market as a whole (trades at 7 times EPS) the sector doesn't experience much multiple compression due to rising rates. I do think there are two

Elliott Gue

4:02

major issues facing the US markets this fall/winter. First, fundamentally, when the economy enters recession then earnings estimates come down. Wall Street analysts are a bullish lot, so estimates are usually late to fall to reflect building economic risks, but we're starting to see that happen now. Since analysts usually adjust their estimates more dramatically as we move through earnings season, I'm looking for significant downside to estimates as we move through the middle of October (big banks start reporting on Oct. 14th). This, I believe, will power the next big sell-off for the stock market. Also, don't forget that 1/3rd of S&P 500 earnings or so come from overseas and, thus, are harmed both by weak economies abroad and the strong dollar. A box-standard bear market in percentage terms gets us to 3,100 and I actually think there's risk we even more downside than that (to 2,500 to 2,750). The second think I'd note is that usually there comes a time in a bear market where the "rot" spreads from the most v

vulnerable groups to "sell everything." When that happens we get a big, final push lower. I believe that's still ahead.

Norman H.

4:05

Dominion stock has been essentially flat for the past 5 years. The dividend is reliable but not substantial. What is your opinion for the future?

Roger Conrad

4:05

Hi Norman. Dominion Energy in my view is a classic "get rich slow" stock. At the current price--which is well below my highest recommended entry point of 85--the shares yield 3.6% with a mid-point of target annual dividend growth of 6% (6.5% for earnings). There's also a very high level of visibility for the earnings growth the next five years at least, since it's basically linked to regulator approved investment in the company's power grid. I've personally owned shares through the company's dividend reinvestment plan since the late 1980s--return on investment a little over 10% a year.

4:10

With the US oil reserves being tapped into the last 6 months, so you see a strong rebound in oil prices when the federal government needs to rebuild the reserve inventory? Any idea when the oil reserves will be reestablishted?

Elliott Gue

4:10

I actually think the bigger catalyst will be next month when they stop selling. The drawdown in SPR reserves since last spring is unprecedented -- we're releasing 1.5 million barrels per day and reserves are back at 1985-86 levels. If it were not for these releases, US commercial oil inventories would have fallen much further than they have to what I'd call "scary" low levels. What happens when they stop selling SPR reserves? I suspect the government is hoping it won't be too bad because November - February is a time of pretty weak demand seasonally. The risk is 1. That inventories fall in November and December anyway and 2. that as we move into next spring, the US isn't able to build inventories fast enough ahead of summer driving season. The government isn't likely to start refilling SPR for at least 18+ months.

Clint W.

4:11

I would appreciate your current thoughts on Vermilion (VET) given the recent pullback in European gas prices (but which are still high), the recent pullback in oil prices, talks of a windfall profits tax, the approaching capital distribution plan etc.

Roger Conrad

4:11

Hi Clint. I've followed Vermilion since the early '00s. And I think the 33% increase in the quarterly dividend announced in August is a pretty fair statement of management's growing confidence coming out of what was a series of major challenges to the company's survival in the previous decade. The company has specialized in low risk projects where management can forecast output and lock in prices. And as a result, it's in pretty prime position to take advantage of Europe's natural gas shortage the next several years.

You've mentioned a couple of near-term challenges, such the windfall profits tax and some relief from spiking natural gas prices. We'll see how long that lasts as winter approaches. But again, this isn't a company run on the spot price. We rate it a buy at 25 or lower--see the Canada/Australia coverage universe on the EIA website.

Gary

4:16

With expecting nat gas to bottom at the end of this shoulder season and Freeport's LNG facilities coming back on-line is it a good time to consider buying UNG or UNG options in October?

Elliott Gue

4:16

Gas prices have pulled back a lot sine touching $10 last month; however, w believe there's some additional downside risk to the $4 to $5 region. The problem is that at current prices (near $7) we're likely to continue to see growth in production. Demand upside is limited by LNG export capacity; once Freeport is back up there's no upside until late 2024. I think UNG might be a good trade at some point this fall, but I think there's more downside first, especially given rising recession risks (which usually hit commodities too).

John A.

4:18

Opinion on CDPYF now that the US$ is so strong and the Canadian apartment company is at its 52 week low?

Thank you

Roger Conrad

4:18

Hi John. The strong US dollar is certainly a headwind to the prices of all non-US stocks. And as you note, that also includes extremely conservative REITs like Canadian Apartment REIT. On the other hand, if you read my individual company comments in the REIT Sheet that published this week, you'll see this REIT is actually very much in the pink of health. In fact, it's taken advantage of the Canadian dollar's strength against the Euro to expand its profitability in the Netherlands. The dividend is safe and still likely to be increased in coming months. Bottom line: No reason now to sell low and in fact this is a very low risk way to bet on an eventual rebound in the Canadian dollar.

Rich

4:22

Hi Elliot. My apologies for the blurted questions earlier. (I'm unfortunately also in the middle of a work presentation.) I'm a new subscriber trying to rebalance. Do you see the risk to growth stocks already baked in? Or do you see significant further risk?

Elliott Gue

4:22

Thanks for the questions, no apology necessary. It is taking us a bit longer to get through the chat today due to the volume of questions. Generally, I still see significant downside risks to growth stocks near term. Of course, the magnitude of the risk depends on the individual names but for the Nasdaq 100 I believe we've seen a good chunk of the earnings multiple re-rating from higher rates, but I think there's still risk ahead to profitability and earnings estimates. There are some very high quality growth/tech names that will eventually be great bargains but that's likely more of a mid-2023 story than a near term opportunity in my view.

Hans

4:24

Roger, With most of my VZ and T having being sold in the last week, what would be the better one to invest in again when things calm down

Roger Conrad

4:24

Hello Hans. I still believe Verizon's outspending of everyone else in the US market to develop 5G and broadband capability will pay off. The real earnings-building capability of 5G is in industrial applications, not the consumer. Verizon has been trailing in the marketing wars for the consumer--largely because it won't discount as aggressively as for example T-Mobile. But the company's award to build a private 5G network at an Hawaiian air force base this month is a pretty good sign it's still the leader to develop the kind of business that's now driving earnings of China's Big Three telecoms. And the stock is definitely at a bear market valuation (7.5X next 12 months earnings) and yield of 6.7%--which it just increased this month. Tough stock to own right now, but hard to see it get a lot cheaper.

Alex M

4:29

Hi Roger. Unbelievable selling pressure in Comcast over the last month. Is the expectation that they will be hit particularly hard by a recession or is it just caught up in the communications space sell-off? Thanks

Roger Conrad

4:29

Hi Alex. Yes, the communications group has been a real disappointment this year to say the least. Comcast is hardly the only major sector company to suffer a big decline--in fact other cable companies like Altice USA have done a good deal worse. But it is definitely trading at a bear market valuation of 8.3X expected next 12 months earnings.

The bear case is basically that the broadband market is saturated and that competition will drive down prices. I wouldn't argue with that prognosis, especially since consumers will likely look for ways to cut spending in a recession. And Comcast's subscriber growth has been nil so far this year. On the other hand, it's still growing revenue at a double digit rate and generated $18 bil in free cash flow the last 12 months. May take a while to recover but looks very cheap to me.

Alex M

4:35

Hi Roger. Has your opinion on MPW changed at all? With the recent price action, it seems like their equity cost of capital could hinder their ability to grow. Any risk to the dividend at this time? Thanks.

Roger Conrad

4:35

I think that's an important question now for any company that's relied on acquisitions to grow in the past--and Medical Properties has scaled back its acquisition pace already, though management blames sellers not bringing down prices enough to reflect a changed environment. The other question some have raised about the REIT is the strength of its hospital operator tenants, which potentially threatens current income.

As I pointed out in the current REIT Sheet issue, I think the company's ability this month to re-lease the Watsonville (California) facility with no financial loss after the tenant went bankrupt is a remarkable affirmation that its focus on properties works. And the yield of nearly 10% is attractive even if there's no further growth for a while. MPW is at a loss and I'll be watching results next month closely. But for now, I think we want to keep holding--not doubling down, a strategy I never recommend.

Jeffrey H

4:36

Dear Roger and Elliot, the Creating Wealth Advisory has recently added a double inverse ETF for the S and P 500 (SDS). If it's just been added, I suspect that you don't envisage selling it any time soon, although the index has dropped a bit recently. How much further do you think the S and P 500 will fall? Again, many thanks.

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