JotCast | 9/27/22 Capitalist Times Live Chat

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9/27/22 Capitalist Times Live Chat

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Elliott Gue

4:36

Thanks for the question. Yes, for much of this year, the sell-off has been concentrated in the tech/growth part of the market. As recently as the middle of last month (August 2022) the Russell 1000 Value Index was still down by just over 3% year-to-date with the Nasdaq 100 down 16%+ at that point. Now, we're reaching the stage of the cycle where the bear market "broadens out" to include more sectors and groups, many that have been relatively resilient to date. So, starting in December 2021, we've concentrated on inverse ETFs tracking growth sectors (Nasdaq 1000, the inverse ARKK ETF, etc.). I still see more downside to growth and upside to these inverse ETFs. However, with the selling pressure broadening out, I believed it was time to take on more inverse broader market exposure via SDS. As far as additional downside for the S&P 500, I have a few "soft" targets, the next one down being the 3,000 to 3,100 range. I see these as "soft" targets because I will continue to monitor the incoming data and the market

Elliott Gue

4:36

technicals to determine when/if it's appropriate to either book profits on these inverse ETFs and/or add to these positions. I would say this also -- I'm likely to get a new CW issue out tomorrow (probably in the morning as I am at risk of losing power with this hurricane making landfall) and I am likely to communicate a strategy for adding more inverse ETF exposure to the portfolio as I am increasingly worried about a new leg lower through earnings season.

arthur

4:37

Please discuss AQN vs AQNU. I own a bit of both, but am down a bit with the AQNU. I am thinking about taking the tax loss with AQNU and buying AQN. Not asking for tax advice, rather, if you see them performing about equally going forward

Roger Conrad

4:37

Hi Arthur. I think they're going to track each other pretty closely. The only difference really is that the preferred pays a higher dividend than the common. But its price is going to track the conversion value into AQN shares over time.

As for taking a loss on one to buy the other, I don't believe you would run afoul of the wash rule doing so--but neither am I 100% sure, so please check that out before you act.

Rich Lawson

4:41

I've got a few growth stocks that I should have sold after the last rally. Should I cut them now? Wait for a rally or keep them till they recover?

Elliott Gue

4:41

Thanks Rich, I answered this question just above. Basically, I do see more downside for growth generally in coming months. There will likely be bounces along the way, but I am, watching the October start of Q3 earnings season as a potential downside catalyst.

arthur

4:42

MPW Where do you see the stock over the next few months and also longer term?

Roger Conrad

4:42

I think the key is the dividend, which is now approaching 10%. It's well covered on the numbers and management recently raised it. The Watsonville re-leasing as I pointed out earlier in the chat is a very good sign and further proof this is a well managed company. The only reason to bet against the company is that the macro situation is just too difficult to weather while paying out this level of dividend.

Management has given no indication it's considering this course of action. But while I think it's unlikely, I don't think it can be ruled out entirely. And that's why we want to just stick with the position we have--rather than adding to it. I have pretty much the same advice for all of our underperformers while this selloff lasts. We don't want to be in the position of having a single stock really blow a hole in our portfolios if we're wrong.

Victor

4:44

Elliott,
WTI was trading around $77 per barrel today. Are we seeing the bottom of this drop in oil prices or is there more downside?

Elliott Gue

4:44

I still see the $70/bbl to $80/bbl as a reasonable downside target for oil though if there is a panicky sell-off in the equity markets I would not be surprised to see some spikes below $70. Generally though the supply picture is so bullish right now it would take a very deep recession to bring oil prices below $70 on a prolonged basis in my view.

Dave P

4:47

Hi Roger, any thoughts on BKH? You had them listed as a buy forever and now you suggest it as a hold. I’ve been watching the company and, to me, the metrics look good. Why is BKH no longer a buy and if it is what price would you recommend gettin in?

Roger Conrad

4:47

Hi Dave. Basically, my buy/hold advice for Black Hills Corp has followed its valuation. When the most recent issue of CUI went to post, my view was the valuation was too high to rate a buy, so it became a hold. After this month's selling, the stock is looking somewhat better, though I want to assess it again before the October issue before changing the recommendation. As far as business developments since the previous issue, the company has set a "net zero" CO2 emissions goal for its natural gas distribution utilities by 2035. With regulators' support for the spending, that could be a pretty reliable driver for growth the next few years. Bottom line: This is a solid company but could go lower depending on how long this selloff continues.

Andrew

4:53

First, thank you for holding these chats, and more thanks for your sage advice. It is a voice of reason in an otherwise volatile market. I have a few questions and I'll send them in separately. First CrossAmerica (CAPL). I know at one point you were less enthusiastic about it - as I recall it had to do with limited foreseeable dividend growth. Now that it's dropped below your $20 price target, do you think it is a good place to put some new money?

Roger Conrad

4:53

Thanks Andrew. I think CrossAmerica's shares are taking a hit right now on worries about a recession, and potential impact on its fuel supply business as well as service station tenants. The company also has an acquisition-led growth strategy that depends on access to low cost capital--though management has also historically been very conservative making deals, a good example being the purchase of wholesale supply assets and contracts from Community Service Stations in a transaction that still looks likely to close in Q4. I want to see what the company reports for Q3. But I think the dividend should remain well covered this year. Shares continue to rate a buy under 20--though again, I want to caution everyone thinking about really loading up on a single stock to instead consider diversifying by putting the money into another stock. That's how to control risk in an environment like this, and there are a lot of cheap energy stocks to choose from now.

John Moyer

4:57

Aesc dropped below 90 and quickly rose back to 100. It is again below 90 - do you think it will run up again?

Roger Conrad

4:57

HI Josh. Yes, absolutely. This convertible preferred stock will follow the price of AES Corp. And that stock is cheap with multiple upside catalysts at 12.8X expected next 12 months earnings. The preferred converts into common stock in February 2024--which provides plenty of time for AES to grow earnings with robust investment in renewable energy, energy storage and LNG. The question I guess is when to expect a big recovery. And the answer to that is going to depend to a large extent on macro factors beyond AES' control. But am I confident in AES's long-run prospects and growth trajectory--absolutely.

Andrew

5:05

Elliott, I've long been disinterested in inverse funds, but you convinced me with your updates. I bought them all this summer. One issue I've always had is the gain is 'capped' at 100% (which isn't realistic because neither the S&P, Nasdaq, or HY bonds are going to zero) My goal is ride them higher (hopefully) and then buy into high quality dividend stocks which will (again hopefully) be lower than today because the market has declined. What informs you that it's time to sell these?

Elliott Gue

5:05

Thanks for the questions. That's pretty much how I see using inverse ETFs as well -- they give the model portfolio a hedge and generate some gains as the market falls. This sets us up to better take advantage of the eventual bottom and turn. In fact, I'm likely, as I noted in the last issue of Creating Wealth, to recommend buying a handful of high quality names in groups like energy/agriculture as the market drops further at lower prices. As far as timing the sale of the inverse ETFs, it's really a function of the indicators I follow. Some of these are intermediate to long-term such as economic indicators like LEI, but I also follow indicators like the ratio of the 3 month VIX to the VIX. When I start to see signs of panic (such as a big spike lower in the VIX3M/VIX indicator) I'm likely to recommend booking partial gains on the inverse ETF exposure recommended in the model portfolio. I do have some "soft" targets in mind like 3,000 to 3,100 on the S&P 500. But, more likely I'll recommend exiting the inverse

Elliott Gue

5:05

ETFs in stages, taking partial profits when the selling gets extreme. For example, late last year I recommended several inverse ETFs in the service and we booked gains on them in May/June when I saw signs of a likely oversold bounce. I know that's not a particularly satisfying answer but it's really a function of so many different indicators, it's hard to single out just 1 or 2 to watch.

Andrew

5:06

Two REIT questions. Simon Property Group (SPG). I know Roger has it in the Model REIT portfolio, but shopping malls seem to be one of the first places people will cut back in a recession. In the latest REIT sheet, I think I read that SPG has stated plans to restore its pre-pandemic dividend. Do you still think that's a realistic goal if the economy hits a recession?

The other is SLGreen (SLG) Roger you were high on this at one time, but now it's a hold. Now that people are being recalled to their office in higher numbers do you think it's a safe time to get back in? Their yield is enticing, but not if it's not safe.

Roger Conrad

5:06

Thanks for those questions. I will also again point out that we posted an issue of the REIT Sheet this week, including our data bank of 86 REITs featuring both Simon and SL Green.

With Simon's recent selloff and yield now close to 8%, I think many investors are assuming the REIT is headed for a repeat of 2020. I think that's highly unlikely for a couple reasons. First, even the worst recession can't match the pandemic's impact on enclosed shopping malls--when governments actually ordered them closed. And Simon arguably got stronger that year, by cutting costs and debt and buying another REIT. Second, Simon raised its guidance last month for the second time this year--so up to now there's been no drop off of business momentum. I think it may take longer to restore the full dividend if things get very bad. But this looks like overreaction so far on investors' part.

As for SL Green, I did add an office REIT to the recommended list, Boston Properties. But i still advise caution on SL.

Roger Conrad

5:08

Continuing with SL Green--business health would take a hit from a real bear market on Wall Street. And the REIT appears to be having to offer discounted rents to re-lease properties--rents -3.2% below expiring ones in Q2. That could accelerate if Wall Street slows down. Boston Properties in contrast is both more geographically diversified and focused on better renewing office properties like Life Sciences. Management also recently raised 2022 guidance for the third time this year.

Victor

5:12

Hi Elliott, do you think that we are going to see the July lows on EOG? Would you add on EOG at the current level?

Elliott Gue

5:12

EOG is below our buy target right now. That doesn't mean it can't go lower short-term, but I think from current levels the gains over a 12 to 24 month holding period are likely to be good. I do think it's quite possible you'll see many of the energy names test their summer lows as part of a broader equity market sell-off. We will be publishing an updated "Dream Buys" table with specific "Dream Buy" prices for our recommendations, including EOG, as part of the issue out this week. Basically, these are excellent prices to accumulate high-quality names on further dips. If we get a market-wide sell-off that brings down energy stocks further, we think this will give us an opportunity to accumulate names like EOG at very attractive prices.

Victor

5:15

Elliott, during the current oil decline, DVN has been more volatile when compared with CLR. I know you favor DVN over CLR. Your thoughts.

Elliott Gue

5:15

I think CLR's lack of volatility is a function of CEO Harold Hamm's offer to take the company private in an all-cash deal at $70/sh. While ongoing market and creedit market volatility may raise questions about whether or not they can close the deal at that price, even just the offer provides a degree of price support for the stock.

Tom

5:16

Gentlemen, My first trial by fire was in '99 - '01, when mostly by accident, I did just enough good selling to only suffer non-fatal wounds. In '08-'09, scared to death, I only bought. In 2020, confident (in no small part due to your counsel), I bought a lot. So I am conditioned to suffer the downturn and add when it seems most dangerous. What bothers me this time is that the underlying socio-economic conditions have eroded so much this past few years. It was shocking when Obama spent almost a trillion to "jump-start" the economy, and now government spends many times that mostly because it can. Discussions of deficits are confined to first-year economics classes. A large plurality of the populace has been trained to accept government support rather than work for a living. I know, there have been wars and recessions/depression before and we always came out of it. But is the bedrock of our national character and financial discipline now so eroded that this might be the time that we don't?

Roger Conrad

5:16

Hi Tom. Thanks for that insightful question. I actually go back a bit further to the late 70s and early 80s when I was first starting my professional life. A lot of people were asking the same questions back then--if something had happened to the character of the country after the Great Society, Vietnam War, double-digit inflation, hollowed out inner cities, devastating labor strikes, a worsening Cold War, oil blackmail from the Arab World and the seeming inability of the US government, corporate America or really anyone to avert the slide.

Every stock market selloff has different drivers behind it. And I personally really question whether the Fed's decision to go Volcker is really going to quell inflation in the long-term--when so many of our challenges require investment.

On the other hand, it was possible to make a lot of money in the 1970s, 80s and even the '00s--when the S&P 500 itself was underwater by roughly 20%! Our job is to find the right investments. We think energy will be among them.

5:19

Elliot, saw your comments about IEF earlier and how you see it difficult for yields to go above 4%. Would you consider adding another tranche of IEF at these prices?

Elliott Gue

5:19

I've been considering it but I'd probably only do so under a couple of different conditions. 1. Add to IEF but also add to something like SJB (short high yield) as a hedge in case yields spike higher than I expect. (I still suspect Powell is talking like Paul Volcker but is more of a Arthur Burns at heart). 2. I'd need to see IEF find a low and see some upside momentum to add to it.

arthur

5:22

Gentlemen, Any reason to be concerned with AGLXY ENERGY? Any specific thoughts about its near and longer-term prospects? Thanks!

Roger Conrad

5:22

AGL Energy is still Australia's biggest producer of electricity from fossil fuels and renewable energy, as well as the largest energy retailer and seller of distributed energy systems including rooftop solar. But the company is also in the middle of a battle for control, with its largest shareholder Mike Cannon-Brookes reportedly unhappy with the company's choice for chairman of the board. That means more disruption and I think a longer recovery period for the stock. The company does appear to be advancing strategy, including a recently announced ramping up of microgrid deployment, as well as giant batteries that will replace soon to be closed coal-fired power plants. So I don't think this company is in any danger of disappearing and there's every opportunity for a positive surprise in the coming year--particularly with Australia's power market stabilizing and the government supporting decarbonization. But this latest dustup in the boardroom does mean we're going to need to be patient a while longer.

John M.

5:26

Would you be a buyer of BSM at the current price of 15.00?

Roger Conrad

5:26

Hi John. I'm sticking with a highest recommended entry point of 14 for Black Stone Minerals LP. This is a royalty trust that pays essentially a variable dividend that depends on realized selling prices for what's produced on its lands--and the drop in oil and especially natural gas prices recently increases the odds the next payment will be lower. I still like it for aggressive investors and I think the dividend will go a lot higher the next few years as output and prices rise. But I also think it's likely a lower payout will cause some selling--so fresh money should be patient.

Jimmy

5:29

Elliott: With the possible low in the S&P you suggested above (2500-2750) is it prudent to buy or hold any equities at this time? It seems clear there are more catalysts to the downside than the upside.

Elliott Gue

5:29

I look at the stock market today much like 2000-2008 or through the 1970s. Over the long haul, I think we could be in for a prolonged period of low or even negative stock market returns in terms of buying a broader market ETF like the S&P 500. There's a concept in behavioral economics and psychology called the "recency" bias. Basically, that means that humans have a tendency to attach great weight to recent experience when making decisions. Look at the past 13 years -- for much of this time, the market has been rallying, interest rates and inflation have been near zero and the Fed jumps to the rescue any time the market dips 10 to 15% from its highs. How do you make money in that environment? Buy stocks on every dip, buy stock/bond hybrid ETFS and particularly buy growth...if interest rates are zero or negative, there's not much time value to money, so it doesn't matter whether a company generates any profits near-term as long as they have attractive long-term growth prospects. The recent sell-off

Elliott Gue

5:29

and the surge in inflation to 40+ year highs has shattered the illusion the market always goes up/buy the dip. Recent experience is now irrelevant but it takes time for everyone to realize that, which is why you had so many talking heads out there this summer calling for a pivot and screaming buy the Nasdaq from the rooftops. The goods news is that not all stocks follow the broader market. For example, energy and gold did well in the 70s -- producing real (inflation adjusted) annual returns even as the S&P 500 got crushed and many growth stocks never recovered their late 60s peaks. Same thing happened in the 2000-02 era. Our view is that energy is an example of a sector that could see some downside volatility near-term, but is an ideal candidate for buying on dips to hold longer term. Just as in the 2000-08 era, it's likely to produce impressive gains as a leader of the next bull cycle.

Don

5:29

With the market drop, if looking for dividend income, the following yields have risen quite a bit: UTG at 8%, MPW nearing 10%, VZ at 6.7. Is it time to start to nibble here.

Roger Conrad

5:29

All of these stocks are below my highest recommended entry points and thereby rate buys for those who don't already own them. Verizon is actually under my Dream Buy price, which is extraordinary for an industry leader with a BBB+ (stable) credit rating and rising revenue. I would say the closed end fund Reaves (NYSE: UTG) offers the most diversification. Medical Properties Trust has the most risk for reasons I elaborated on answering questions earlier in the chat. But the key overall is I think to be patient, consider buying in increments to take out the emotion and above all diversify, so an unexpected setback at a particular company will cause a loss not blow a hole in your portfolio.

Don

5:33

Also- thoughts on entry points on SRE and ATO.

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