JotCast | Capitalist Times October 2021 Live Chat

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Capitalist Times October 2021 Live Chat

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Elliott Gue

3:11

10%+ market corrections happen an average of once per year and we haven't seen a move like that in over 18 months, so you could see we're "overdue." That said, I believe far more money is lost trying to time market pullbacks than almost any other financial endeavor known to humanity, so it's important not to be too anticipatory. In my view, we could well be facing a "Lost Decade" for the broader stock market similar to the late 60's to early 80's period or, more recently, the "aughts" (2000-09). There are a couple of reasons for that including that valuations are extremely stretched -- based on the current cyclically adjusted price to earnings ratio for the S&P 500 at 38.34, the market is more expensive today than at any other time in American history except for late 1999-early 2000.

Elliott Gue

3:11

That doesn't mean it can't go higher in the next 6 or 12 months but it does suggest that returns over the next 10 years or so are likely to be in the range of 2.5% annualized, which isn't even enough to keep pace with the current rate of inflation. So, I think making money will be all about stock and sector selection and given the current trend toward higher inflation and more volatile, less predictable economic growth I favor groups like the financials (benefit from rising rates) and energy (benefits from higher inflation and supply side issues). In the late 60s and early 70's the growth stocks that led the erstwhile bull market were known as the "Nifty 50" and they got destroyed in the subsequent bear market. I'm looking for something similar to happen here -- I think there are extreme pockets of bubble-like valuations in tech and other growth groups that could unravel in the coming years.

Jeff

3:15

Would you have an opinion on HESM?

Roger Conrad

3:15

Hess Midstream is a pick in our model Energy and Income Advisor portfolio and has been a High Yield Energy List recommendation as well. And it's one of the very few midstream companies that's consistently raised dividends the past few years, which is a pretty good measure of the strength of the underlying business. Management released Q3 results this week and boosted guidance, while generating roughly $120 mil of free cash flow after paying dividends. Because producers have stayed conservative with CAPEX, midstreams like Hess have had to adapt to a lower volumes environment by keeping a lid on costs and optimizing existing assets. These results show they're doing what they need to and have adapted to the current place in the cycle. I would say midstreams are not as leveraged to where we are now as producers. But this is a safe investment for income investors and so long as that's the case, it will produce big cap gains as well this cycle.

Victor

3:20

Biden wants legislation from Congress to spend trillions more on top the trillions already spent due to the pandemic. The deficit is out of control. We are seeing inflation way higher compared with what the Fed claims acceptable levels. There are all kind of shortages from food to plumbing supplies. Workers are not incentivized to work when the government is giving money away to anyone. This has created labor shortages and a significant increase in hourly wages and thus fueling the inflation fire. As we all know gas prices are through the roof. Are we seeing all the signals of a coming recession? What are your thoughts?

Elliott Gue

3:20

In my view inflation is a problem and it's not temporary (at least not all of it). I also think the Fed is more concerned about it than they're publicly acknowledging, which is why we're now seeing this rather dramatic shift in favor of removing accommodation faster than expected. In my view, however, the genie may already be out of the bottle as we're seeing a rise in inflation expectations and that tends to feed on itself (as we saw in the 70s). However, inflation and a recession are two very different things -- there's a popular perception that economic growth in the 70's was weak (the stag part of stagflation) but that's actually not true -- real economic growth (adjusted for inflation) was actually higher in the 70's than the 1990s, which many regard as a sort of latter day "Golden Age" for the US economy and stock market.

Elliott Gue

3:20

The difference between the 1982 to 2000 period and 1968 to 1982 was that the former showed far less economic volatility and a much longer cycle (long expansions and only short, mild recessions) while the 70's brought a lot of economic volatility, business uncertainty and frequent, deep recessions. So, if we are entering a period more like the 70s again (as I expect) then the recent bout of inflation suggests that we're in the late cycle of the expansion but a recession is not imminent.

John

3:22

Good afternoon gentlemen. I want to thank you for the good advice you give us from your many investment services. I have subscribed to many of them through the years and own quite a few holdings in my portfolio. I would like your opinion on how many holdings one should have to benefit from each service you provide, and what percentage of each category such as energy, reits, utilities etc. one should own in a balanced portfolio. Thanks John

Roger Conrad

3:22

Hi John. Really appreciate those comments.

Judging from what we've answered so far in this chat, this is a question many of our members have. And unfortunately, as an investment information and advice provider, we have to operate under rules that basically forbid from sharing views that are too personal. What I did say answering a question earlier on is that we do offer a managed income portfolio--CUI Plus/DDI Income--as well as a managed growth portfolio--CW/DDI Growth. They're both part of our Deep Dive Investing package, along with the REIT Sheet. And if having them all in one (as well as metals coverage) is of interest, please call Sherry at 1-877-302-0749, Monday through Friday, 9-5 pm ET.

Also earlier in the chat, I said that investors can follow these portfolios and add to them, in Income's case by following the principles of diversification and balance. And while it's tough to generalize about what's optimal, we usually say no more than 20% to a sector.

Victor

3:29

Here are some names that have gone up recently: CLR, MRO, PDCE and FANG. Can you comment on these names and do you feel that this uptrend will continue?

Roger Conrad

3:29

HI Victor. All of these companies produce oil and gas. And with prices rising this year, that's been a very good thing for businesses as well as share prices. If you take a look at the producers currently in the EIA Model Portfolio, you'll see some that have done even better, and those remain our top recommendations. All of these companies are tracked in our "E&P and Services" coverage universe, which you can view under the Portfolios tab on the EIA website. We do believe they'll all go higher during this price cycle. For advice and other information on these four, check out the coverage universe table.

Gary

3:30

Uranium price and uranium stocks are up sharply. But when do the utilities have to take up new contracts for supply that will stabilize the uranium price and uranium stocks at a higher level? This is such a closed market to the public hard to know when uranium stocks/supplies will be in higher utility demand.

Elliott Gue

3:30

I think the main driver of what we've been seeing in the uranium market is the Sprott Physical Uranium trust, a vehicle that buys physical uranium, giving investors a chance to participate directly in changes in the market price. I've seen some estimates that suggest the funds' buying is on a pace to add 50% to global spot market uranium demand on a one-year basis and all that buying drove up the spot price. In short I think there's a lot of speculative fluff in the price of these stocks right now. Longer term, there's a supply overhang issue -- including massive idled capacity in places like Kazakhstan. What I'd watch for is, as you suggest, to see if we start to see utilities willing to step in and buy under long-term contracts, which would benefit the producers by giving them some predictability. Right now, though, the whole space looks very speculative and frothy and I think we're going to need to see spot prices remain elevated for a time before we see those contracts.

Ed P

3:33

Do you have an opinion on ICD? Or is it too small for your coverage?

Elliott Gue

3:33

We don't currently cover it due to its small market cap ($30 million). I would say that generally the land drilling space isn't out favorite right now as the E&Ps have adopted a more conservative CAPEX strategy which implies less aggressive drilling activity and an oversupply of high-spec rigs.

Clint W.

3:38

Fastgraphs, and other similar services, provide historical OCF/Share, EBITDA/Share and various other metricses and let you choose a multiple to create a possible future share price estimate based on the consensus estimates of analysts. I know there are a multitude of factors that will ultimately determine the future share price and that it will vary widely company by company, but I would like to know your general thoughts about multiples through this next cycle. For example, looking at OXY in FastGraphs, the stock has generally traded at a 2.56 EBITA/Share multiple for the current year and has averaged 6.85 for the last 10 years. Using OXY as just one example, if you believed they were going to stay disciplined and bring their debt leverage into an acceptable level through utilizing cash flow and selling off assets, what would be your general thought about the multiple you would use to ballpark future stock prices? Would you assume that multiples in the future will be higher or lower than the past?

Elliott Gue

3:38

One of the problems in the last cycle (arguable THE problem for the entire oil market) was that producers were willing to outspend their cash flow to show growth in barrels coming out of the ground. As a result most producers didn't show much consistent EBITDA or free cash flow and their earnings multiples on these metrics looked high. In the coming cycle I'd expect to see a laser-like focus on cash flow and free cash flow, which will boost the denominator of those multiples (making the stocks look cheaper than the last cycle through the entire cycle). The valuation metric I pay closest attention to right now is to look at free cash flow over the long term and then attempt to discount those future cash flows to create a present value.

Mark

3:39

Hi Roger and Elliott .. always look forward to your thoughts and insights . Do you think midstream will recover to their pre pandemic levels and so what will trigger this and when do you think it might happen. Are we riding the energy space horses with the weakest chance of recovery. Should we be rebalancing toward the producers. Could you comment on the sudden drop of EDP, ET, KMI, and MMP and legals challenges facing ET. Thank you. Mark

Roger Conrad

3:39

Hi Mark. Eventually, the energy price cycle will boost companies up and down the value chain. But in previous cycles, different sub-sectors have benefitted most at different times. Producers, for example, are now obviously able to lock in very good prices for the oil and gas they sell. That's benefitted their and so has the generally conservative approach to CAPEX--favoring free cash flow generation and debt reduction over ramping up output. That's prevented a midstream volume recovery. We believe there will be one eventually and in the meantime, our favorite midstreams continue to demonstrate they've adapted by cutting their own CAPEX, operating costs and debt while optimizing existing assets and even scaling up with acquisitions. That makes their dividends all the safer and in fact MMP just raised its payout for the first time in two years. Bottom line is producers are better at this stage of the cycle for cap gains but best in class midstreams' dividends are safe and their time will come.

Roger Conrad

3:41

I also wouldn't get too excited about recent midstream stock price action--which seems a knee jerk reaction to oil's brief retreat. Also Energy Transfer continues to be very successful in the courts. I have some concern about how long it's taking to close the Enable Midstream acquisition. And we'll see more on that front with Q3 results November 3.

Kathy M

3:46

Do you have any updated thoughts on the next 12 month's price action for Suncor Energy (SU)?

Roger Conrad

3:46

Hi Kathy, Suncor Energy shares just hit a new 52-week high following the release of solid Q3 numbers and a doubling of the quarterly dividend back to the level paid in December 2019. I think the company will continue to benefit from its own efficient integrated business model, strong balance sheet and scale. It's a winner from the closing of price differentials with the opening of Enbridge's Line 3 pipeline. And it stands to really benefit from the Trans Mountain expansion, which as I said answering an earlier question looks like it's on track to enter service in mid-2023. We track the stock in our Canada and Australia coverage universe, currently as a buy up to 25. You can access the table by clicking on the Portfolios tab from the EIA homepage.

Victor

3:54

SHLX has not participated in a substantial way in the energy sector rally. What is your outlook on SHLX?

Roger Conrad

3:54

Shell Midstream is one of the more recent dividend cutters among energy midstream companies--shaving its payout to 30 cents from 46 cents with the August payment. That hasn't helped share price performance since. But more important to underperformance is that general partner Royal Dutch Shell has still not really declared its intentions for this MLP, which it lost interest supporting with drop downs some time ago and has been non-committal regarding its dividend as well. Currently just 31.49% of SHLX is owned by the public with Shell owning the rest. Our view there's a high probability Shell is simply waiting for a good opportunity to buy in the rest at a more discounted price. And that's basically why we've advised avoiding SHLX dating back to when it traded at a much higher price. Yes the yield looks attractive near 10%--but with these shaky foundations there can certainly be another cut down the road. There are so many other attractive midstream companies yielding almost as much, and increasing payouts.

Eric

4:01

Thanks for getting us through the energy downturn. Between the integrated, E&P, midstream, services, refining and clean energy segments, how would you rank them in terms of total return potential over the next 1-2 years?

Roger Conrad

4:01

Hi Eric. The 1-2 year question really depends on how quickly this energy price cycle unfolds--and we don't really have a good basis for making that kind of forecast. But you are definitely looking at the energy sector the same way we are. And as we've pointed out here, in a typical cycle, producers have made their biggest gains earlier, while midstreams only really participate when CAPEX levels increase to boost output. Services companies' earnings (and share prices) eventually become double leveraged to the cycle--as utilization rates increase with producers ramping up output and they can raise rents and fees. That usually doesn't happen until later on though. I'm not really sure "clean energy" is that tied to this cycle at this point, since government has become such a big driver of spending and there's so much hyped up junk out there.

Again this is a subject we're going to come back to again and again--so while I can't say what 1-2 years will look like, we will tell you when each sector's time is coming.

Arnold S

4:07

Any thoughts on Brookfield Renewable Partners LP BEP?
It seems to be bouncing between $35 and $40 for the last few months.

Roger Conrad

4:07

Hi Arnold. Nothing has really changed with this company, which reports Q3 results and updates guidance on November 5. They're still adding new wind, hydro and solar assets on a truly global scale. They appear to have a multi-year runway to keep expanding. They've repeatedly demonstrated the ability to sell assets at good prices to recycle the capital into better ones. And they've shown that adding scale does increase profitability as well as consistency--low water conditions in western Canada, for example, no longer derail quarterly earnings. I think the shares got ahead of themselves earlier this year, especially BEPC, but are bargains once again for patient investors who want a solid combination of yield plus growth with low risk.

Eric

4:12

Do you still think $18 is a dream price for KMI?

Roger Conrad

4:12

Hi Eric. To be honest, I'm surprised Kinder Morgan has remained this cheap for this long. But I'm happy to keep recommending shares at this level, so long as the company is making opportunistic acquisitions like Stagecoach that increase its nationally leading natural gas transportation market share. And I like the investing in the long-term future of its pipes with renewable natural gas, carbon capture and hydrogen--all while generating surplus cash flow after dividends and CAPEX. I thought Q3 results disappointed some because they did not indicate a volumes recovery. But as I've said several times in this chat, our view is that will happen eventually in this energy price cycle, which ironically in large part because producer CAPEX remains low promises to be quite wild.

AWS

4:17

Any hope for some money losers in my portfolio? SHLX, ENBL, HEP, WES, ENLC, MMP? I don't have large positions in any of them, but I somehow forgot I had them in a rarely used brokerage acct.

Roger Conrad

4:17

As I've mentioned a couple times this chat, Magellan just announced its first dividend increase in two years--a pretty good outward sign of inner grace that I expect to find out more about when the company announces Q3 results on Nov 2. I like Enable largely because it will be in much better shape after merging with Energy Transfer--but even if federal regulators block that deal I think co-owners Centerpoint Energy (NYSE: CNP) and OG&E Energy (NYSE: OGE) will find a buyer--very likely at an even better price given where we are now in the energy price cycle. I think Western Midstream has very likely turned the corner with distributions rising again and 49.09% owner Occidental turning around. I don't think Shell Midstream is worth anyone's while as I indicated answering an earlier question. We're lukewarm on HEP and ENLC though current dividends appear stable.

salvatore

4:22

Afternoon Gentlemen Is there any reason for the drop in pricing for both EPD and MMP today .

Roger Conrad

4:22

HI Salvatore. Not anything that affects the underlying value of either business or the safety of their distributions. Both Enterprise and Magellan will report Q3 results and update their guidance on November 2. But at this point, both appear to have adapted well to the current subdued volumes environment--which again is the result of producers holding down CAPEX. That means dividends are safe and likely to grow--again MMP just announced a boost--and as this cycle unfolds both EPD and MMP will add to the gains they've made year to date.

Tom L

4:29

SUN has had a strong run in last 1+ years, increasing from around 25 to 40. What are your thoughts going forward for this energy MLP?

Roger Conrad

4:29

Hi Tom. That really depends on what Energy Transfer LP decides to do as the general partner and 34.15% common shares owner. As a fuels distributor, Sunoco has benefitted greatly from Americans' return to the country's highways. The company announces Q3 results and updates guidance on November 3. And I would expect to see another sequential increase in volumes and cash flow from Q2, which will further support the dividend level paid since November 2016. That will directly boost ET's results as well. The big question is whether it will see value in offering to swap its own shares for the 65.85% of SUN now owned by the public. I think that could be ultimately beneficial, though the swap ratio would likely include a payout reduction as ET's other deals have. That possibility is the primary reason we rate Sunoco a hold, and why we've favored CrossAmerica Partners in that group in our High Yield Energy List.

Tom L

4:40

Do you follow STEM as a newcomer to the Energy Grid business? Your perspective on this company? Thanks, really appreciate your commentary.

Roger Conrad

4:40

Hi Tom. It's not one we've covered in the past. One reason is its very short history (IPO August 17, 2020). And despite some impressive business plans and products, operations were still cash flow negative as of the end of Q2. That may have changed in Q3, if positive business trends from last quarter continue, such as the 13% lift in contracted backlog and more than doubling in contracted assets under management. We'll see results on November 9. Overall, this strikes me as a company with a great idea but that ultimately is going to face a lot of competition, considering the huge investment going into optimizing energy storage capability and how far it still has to go to reduce the intermittency challenge for wind and solar. It's also a very volatile stock--and will be until/unless it generates real earnings. Thanks for the question.

Dave

4:58

Looks like Telephone and Data Systems (TDS) filed a Form 15 recently to deregister from SEC filing responsibility. Would you please be able to provide your thoughts on this step they've taken and whether it affects the desirability of TDS as an investment? Thanks for all you do!

Roger Conrad

4:58

Hi Dave. Thanks for those kind words. As for TDS, this is a positive.

TDS posted a Form 15-12B that deregistered their 5.875% senior notes due 2061. The other securities were listed below it on the same form as standard (though admittedly confusing) legal practice. The Form 25 filed at roughly the same time clarifies the fact that only these bonds were affected, as well as that the company is in full compliance with SEC regulations in this matter.

Also, the reason for deregistering the securities is the company called them on Oct 14 at a redemption price that was 100% of par value ($25). It made this move to reduced interest costs.

Shares have been under some pressure the past couple months, as have most telecoms. I suspect market structure issues--mainly the result of some ETFs getting sold. But in any case, the key date for TDS is Nov 5, when they're expected to release what should be solid Q3 results and guidance.

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