JotCast | July 2023 Capitalist Times Live Chat

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July 2023 Capitalist Times Live Chat

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Roger Conrad

2:37

Hi Sandy. I'm sorry you weren't able to get in to Abbvie when you wanted. And as you pointed out, shares are up nicely today on what were very solid Q2 earnings and an actual boost in 2023 guidance. I'll be highlighting the results along with the rest of the CUI Plus/DDI Income portfolio in the next update. Investors reacted favorably (understandably) to the fact that Humira sales didn't drop as much as expected in the US, while Rinvoq and Skyrizi sales rose more than anticipated. The stock near 150, however, is definitely now pricing all that in. And I think the thing to do is watch for a dip. In fact, if it gets much higher than this, I may be tempted to take another piece off the table. It's a great company and the earnings news is encouraging. But competition is going to increase for Humira. And ABBV shares will certainly come down if the economy and stock market do weaken.

Elliott Gue

2:38

As for EQT and CHK, both have good hedge coverage against near-term gas price weakness and will benefit from a recovery in prices into next year as supply and demand rebalance. Given the scale of new LNG export start-ups in late 2024/early 2025, I do think this will be a dramatic additional source of US gas demand that will keep long term prices averaging closer to $4/MMBtu.

Guest

2:41

Roger, I am seriously considering a substantial position in TRP. At present I own zero. Do you still like? Thanks, Richard

Roger Conrad

2:41

Hi Richard. I never recommend really loading up in a single stock, no matter how attractive the price looks. But I do think TC Energy is looking very cheap right now for a midstream company with its staying power and now very high dividend. Earnings are tomorrow. And as I indicated a few questions ago in the chat, the Columbia pipeline fire in Virginia and progress on the Coastal GasLink Pipeline are two issues that will figure prominently in how investors react to Q2 numbers and the guidance call. But at this point, I intend to stick with this stock, which is actually now trading well below what I consider a "Dream" entry point.

Janet

2:46

What are your thoughts about holding MDU and KNF at this point?

Roger Conrad

2:46

Hi Janet. I think they're both great companies. And now that they're separated rather than part of one MDU, we're seeing investors awarding them a higher valuation. Based on the value of 1 Knife River share for 4 MDU, the combined companies are now worth about $33-$34. And I think that value will rise even more when MDU spins out the construction services business to become a pure utility. I will say that KNF is basically a cyclical company. And longer term I would expect the stock to be more volatile--no clear indication they'll ever pay a dividend either though I think that's likely. MDU itself as a utility should trade at an improved valuation. But if you're an income investor, you might consider substituting KNF for a stock like BHP--which is also a resource company but pays a dividend.

Roger

2:50

For the last several years (KMI) dividends have been classified as a "Return of Capital." That is not income. What is the rational for holding the stock?

Roger Conrad

2:50

It's actually not "return of capital" in the sense they're tearing apart the business and giving it to shareholders piecemeal. It's just a designation for tax purposes that companies in the midstream energy business like Kinder Morgan can make--which is tax advantaged for shareholders and therefore a benefit of owning the stock. The reasons for owning KMI is it's the leading natural gas pipeline franchise in the US with a clear path to very steady asset expansion, and therefore cash flow and dividend growth. Shares have been a relative laggard, which I believe is in large part because investors remember the dividend cut in 2015. But it's a very high quality midstream stock. And I think by the time this long-term energy upcycle ends it will be at a much higher price.

Jim

2:55

Hi Elliott,

Wanted to you your thoughts on a couple of notable headlines about this market.

Not since 1929, has a recovery rally gone above the 78.6% Fibonacci retracement and not gone on to make new all time highs.
Longstanding bear Mike Wilson from Morgan Stanley has finally thrown in the towel.

Thanks for your thoughts on this and the general market.

Elliott Gue

2:55

I have read that statistic also regarding the Fibonacci retracements. I don't normally follow that sort of analysis closely but it makes some sense to me; I did look at bear market rallies in the last several decades and the rally off last year's lows is more powerful than you'd normally see for a bear market rally rather than a new bull market.

One offsetting point is that most of the rally has been driven by a few stocks. If you look at the S&P 500 Equal Weight, for example, it's up less than 10% this year against a 20% rally in SPX.

I do read Mike Wilson's commentaries occasionally and, I have (and still) share some of his longer-term concerns regarding the US economy and stock market. However, I think it's kind of tough for a strategist at a major bank to be seen as "fighting the tape" with the market flying higher. So, I can't say I'm totally surprised he capitulated. I'm also not sure that's bullish -- I still remember when long-time bear Julian Roberston capitulated in March 2000.

Elliott Gue

2:55

A far as my thoughts on the market, in the short run stocks are governed by factors like sentiment and momentum. So, I wouldn't be surprised to see the move continue. I did an analysis (I think I posted it on Substack as well) that showed a strong historic tendency for powerful "thin" rallies (driven by few stocks) to broaden out in the second half of the year. So, I am looking for groups like energy to assume more of a leadership role should the rally continue. So, I think there are places to play the rally near-term -- I have added several new recommendations to model portfolios in recent months -- but long-term returns from buying stocks are not good at current valuations and I still think there are economic issues out there that will prompt more turmoil eventually.

Dayton A.

3:07

I just couldn't bring myself to buy CRH, Japan and Brazil ETF's over HES. Too compensate for overconcentration in energy, I'm holding a 40% cash position at @ 5% interest.

Your turn to review and comment...

Elliott Gue

3:07

We're certainly bullish on HES. I think their cash flow potential is underappreciated and it sees the next stage of the Guyana project is going to start up on schedule this year. Guyana has been a cash sink for HES but it's turning into a free cash flow gusher as Exxon starts up the project in stages.

I also see upside potential for EWZ, CRH and EWJ; CRH, in particular, has been a strong performer since recommendation in mid-May. And I generally prefer some diversification rather than going "all in" on one sector or stock.

But, cash at 5%+ certainly is a good hedge and it makes sense to hold more cash if your portfolio is concentrated in terms of sector/stock exposure

James

3:16

Hello Elliott, In the model portfolios, you sometimes scale into positions as they pull back in price. Other times, you scale in only if it moves higher. Can you describe the rationale behind using one versus the other approach? Have you look back to see which approach has resulted in the best results as part of a retrospective?

Elliott Gue

3:16

It really depends on the stock and market environment.

In general, in weak markets, I try to remain very disciplined in terms of entry points. In a bear market, stocks have a tendency to fall a lot more than one expects or can be justified by the fundamentals. So, I often recommend circling the wagons around a few of the highest quality names and then using weakness to assemble a position at irresistible prices.

In stronger, more "normal" environments I sometimes recommend buying a small stake in stocks to start and then adding as the technicals back up my fundamental positive outlook.

Typically, when creating a model portfolio I set a "target" full stake in a stock, based on the size of the model portfolio and the volatility/risk of the stock I'm recommending. It's rare I go "all in" on a name to start; I prefer to scale in and scale out. The choice of whether to buy weakness or buy strength then depends on my assesment of the market environment and the particular recommendation and it's historic

Elliott Gue

3:16

trading patterns. I do monitor the success and failure of both strategies over time. Sometimes one works better than the other, but I really dio think that depends on the character of the broader market. Both can work well.

Wesley M

3:22

What do you think of Petrobras? PBR Some of the numbers look impressive

Elliott Gue

3:22

I think PBR is interesting. One thing to watch is that they're exploring up in northern Brazil, in an area that's part of the same trend as what HES/XOM are targeting in Guyana. I think that could be a game-changer for them.

We don't correctly recommend the stock in EIA, though for this (and other reasons) I recommend the iShares Brazil ETF over in my Creating Wealth service. I think the Brazilian central bank will slash rates 50 basis points next week and Brazil's monetary policy is very, very tight right now. So, I think that could boost the Brazilian market generally into this fall. PBR and the Brazilian market generally are also among the cheapest in emerging markets and Brazil is a commodity-levered economy. Finally, I think the political situation there isn't as bad as some hard feared -- Lula, the current President, was also President around 20 years ago.

He's left-leaning, but two decades ago he talked big and then governed as a more centrist. History seems to be repeating.

Elliott Gue

3:22

The more left-leaning elements of Lula's party also pretty much despise his Finance/Economics minister, but he has remained supportive and the market likes him. So, that's encouraging as well in my view. Trading at 8 times earnings a lot can go wrong in Brazil and stocks can still perform well (unlike the US, priced for perfection now).

Buddy

3:26

Elliott, Do you follow CLB and, if so, what is your latest opinion? Thanks

Elliott Gue

3:26

Yes, I do. Generally, they have exposure to two broad trends: Shale (not a great place to be now for a services company) and offshore/deepwater (a truly awesome market right now). I've been a little reluctant to get more bullish the name due to their shale leverage, but I do think they'll be in good shape longer term. They just reported (yesterday I believe) and I haven't gone through their call just yet -- I can probably give you more specifics once I get a chance to work through their numbers a bit more. It's a name on my "list" for this quarter. Generally, I'm looking at new names for the portfolio -- you may have noticed we've added several new names in recent weeks.

Victor

3:31

Hi Elliott, you mentioned in one of the reports that nat gas prices are depressed and close to what we saw in 2020. As nat gas prices go up to what would be considered normal CHK should probably go up too. CHK’s all time high is more than $107. Where do you see CHK as nat gas prices go back to normal averages?

Elliott Gue

3:31

I value all of the E&Ps in basically the same way, using a discounted cash flow model based on their capital efficiency and operating costs. I use their existing hedges and the natgas futures curve, which is a good estimate for the long-term average price of gas in my view.

(It's not very important for CHK, but I usually use a $80 flat price for oil after mid-2024.)

Long story short, my latest valuation for CHK based on these assumptions is roughly $125 per share -- I would say I think that's conservative because I think their cost structure might come down near term plus I think they may have growth in production beyond what I've factored into my model.

Buddy

3:37

Barron's had a lead article (June 26) on the offshore drillers, basically concluding that it's the next energy hot sub-sector. Elliott, do you share their view and which stocks would you favor. Thanks.

Elliott Gue

3:37

I believe offshore will see increased spending and development. The truth is that most of the conventional onshore fields -- at least outside OPEC and shale -- have already been intensively developed for decades.

So, what are the big accumulations of hydrocarbons we've been hearing about in recent years? Exxons (deepwater) Guyana development. I think Equinor has some interesting fields way up in the Arctic offshore Norway. Africa, Gulf of Mexico, Brazil...even Saudi has some interesting offshore fields.

I do not think the world can meet growing demand without more development offshore. And it's going top be expensive, particularly since CAPEX has been terrible since 2014. But, it will happen and that means years of growth ahead.

Elliott Gue

3:37

Names in the portfolio like SLB/BKR benefit (particularly the former). HES/XOM also benefit as producers in some of these massive low operating cost plays. I am in the process of digging into the offshore drillers again and I think there are some interesting plays in that regard as well.

Victor

3:52

Elliott, in one of your reports you explained how the Saudis are trying to push oil prices to higher levels. In the last few weeks we’ve seen oil prices to go up but that’s mainly because of the driving season. Is this is a sustained new uptrend? Where do you see WTI oil prices by the end of this year and how can we take advantage of it?

Elliott Gue

3:52

US demand has been solid and inventories for oil and refined products have been pretty tight, so that's helping. But I also think the supply-side announcements have been crucial for oil -- Saudi committing to another month of 1 million + barrels of voluntary cuts. Russia now beginning to reduce production.

I think there's a misconception out there that the Ukraine-Russia war and related sanctions have hit global oil supply. The opposite is actually true -- Russia ramped up production to pay their war-related expenses and dumped oil at a discount to willing buyers like China and India. On top of that, last year as prices spike, Saudi and the rest of OPEC also increased supply and the US eviscerated the SPR to supply yet more crude to the market. Now that excess supply is actually reversing or will reverse.

Elliott Gue

3:52

Let me put it to you this way -- if the current supply/demand estimates are close to correct, the world is undersupplied to the tune of 2 to 3 million bbl/day through December and oil "should" be at $100/bbl+. The fact that it's not suggests no one believes the demand side of the equation, but I think the rally in oil lately reflects the growing realization that any recession in late 2023 or early next year would need to be bad -- I mean 2008 bad -- to turn that 2 to 3 million barrels/.day into a balanced market that would support oil at $70/bbl where it was a few weeks ago. Suffice it to say I'm turning more bullish oil and the recent technical break above the 200-day moving average suggests room to run north of $90 at some point in the next 3 to 6 months.

Victor

3:54

Hello Roger and Elliott. Thank you for the detailed reports and for keeping up us up to speed on everything EIA. I’m not sure if anyone has asked this question but how does the dream price get calculated for each stock on the list? For example, KMI’s weight on the actively managed portfolio is almost 4% and the stock has been trading below the dream price. Would you say that now is the time to add up to 4% of KMI for someone who is tracking the actively managed portfolio?

Roger Conrad

3:54

Hi Victor. The short answer is yes, if you want to track the Model Portfolio's performance you'll need to follow the relative weightings as recommended. That said, we realize most people pick and choose the recommended stocks and hold them in the context of much larger portfolios.

Regarding Kinder Morgan Inc and Dream Buy prices in general, the midstream's stock has been basically trading in its current range since early 2016--following a recovery from the big drop in 2015 when it cut its dividend. It's sometimes been a bit higher and occasionally lower when it went down with the rest of the market. Dream Buy prices are set at levels that historically stocks have only reached following major declines and have since recovered from. That's still our view for Kinder by the time this energy upcycle ends. The company is growing steadily, which should ultimately earn it a higher valuation.

Wesley M

3:58

Any thoughts about Devon Energy (DVN)? It seems to be moving sideways lately

Elliott Gue

3:58

Generally, we like DVN and it's a quality producer. Historically I have been less of a fan because they have more gas exposure compared to an oilier name like PXD. However, I continue to like the intermediate-to-long-term gas story, especially with all the new LNG capacity come on towards the end of next year and into 2025.

My problem with DVN right now is I just don't see great catalysts for upside. My discounted cash flow valuation target supports upside to the low $60s, but that's not much given the current quote of $52 or so. Some pipeline outages have hit their realizations, particularly for gas. They've been forced to sell volumes into the oversupplied market out in west Texas.

SO, I just see better opportunities and more catalysts for upside in other names -- either gas-heavy names like EQT/CHK or underappreciated cash flow stories like HES.

Guest

4:02

Thank you for your thoughtful analysis. Does the failure of nat gas prices to rise in response to the unprecedented heat indicate that the renewable energy transition is occurring faster than has been assumed?

Elliott Gue

4:02

I don't think so. US gas burn has been elevated all year -- both last winter and this summer -- so there's plenty of gas getting burned in power plants.

Hot weather is dramatically overrated as a driver for gas -- the summer isn't actually all that important for US gas demand. There's almost no way -- regardless of how hot it is -- for got weather to drive enough demand to bring down the 300+ bcf of excess storage the US built up last winter.

The bullish gas story isn't about the current price of gas. It's about the combination of production coming down due to low prices and a falling rig count. Also, the likely surge in demand from new LNG export terminals in 2024.

Dan N

4:02

Hi Roger- any opinion on PG&E’s plan to spin off a large stake in its power generation portfolio, including its hydro assets?

Roger Conrad

4:02

Hi Dan. I think it makes sense. The utility's focus is on its T&D--basically running the grid. And the potential CAPEX-to-rate base opportunity is immense, given California's plans to electrify basically everything and regulators' willingness to allow utilities a fair return on investment. The generation business is not really core to that plan. And while they are keeping the Diablo Canyon nuclear plant open longer--with federal/state subsidy--it makes sense for PG&E to monetize these assets, preferably with a financial partner who will fund whatever investment in them is needed.They announced Q2 earnings today and updated guidance--and it looks like we'll see a small dividend restored next quarter. That's the latest chapter in their recovery, which has once again affirmed that regulated utilities will always come back from whatever hardship they face. It's not in the portfolio at this point but is a buy at 18 or lower for patient, risk tolerant investors.

Victor

4:07

Hi Roger, CCJ is just below the buy price. Since this is a new addition to the portfolio should we consider adding this one or wait until they report earnings? I’m asking because it has been trading in an uptrend since April.

Roger Conrad

4:07

Hi Victor. That's always a good question to ask. In this case, Cameco will announce on August 2 and is seeing a pretty good run-up in advance. I think it's more likely that's the result of building investor excitement about uranium in general than anticipation they're going to report good numbers. And for that reason, I don't think there's too much risk of a "sell on news" reaction. I think the main thing is just to buy it below the highest recommended entry point we've emphasized. That's 34 or lower.

James

4:09

Where do you see SLB stock heading in the short term (2-3 months)? It has been strong recently and recovered nicely after the negative reaction to earnings, but I wonder if we are about to hit a wall soon around the $60 area.

Ultimately, where do you see SLB price at when the energy up cycle eventually tops out years from now?

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