JotCast | October 2023 Capitalist Times Live Chat

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October 2023 Capitalist Times Live Chat

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Elliott Gue

4:20

natgas as a feedstock. So, I still like CF and recommend it in the model portfolio. I think the FMC risk is overblown and CF's earnings on 11/01/2023 could be an upside catalyst. My target remains for CF to ultimately get back to $110+. I'm actually in the process of writing a detailed deep dive into nuclear energy and uranium for EIA (I've been a bit delayed because I needed to do a deep dive into the CVX/HES, CHK./SWN and XOM/PXD deals which seemed more urgent.) However, the bottom line is that the world's uranium mines don't produce enough to meet demand, so prices are rising and CCJ is one of the only investable companies with significant low-cost uranium production. It got a little ahead of itself earlier this fall and we took advantage of that to take profits on some trades on CCJ for our two trading services. But I still like this name longer-term as we'd regard dips as buying opportunities.

Karl

4:32

I saw an article that Eni (E) is divesting non-core oil assets to concentrate on its natural gas business. It is selling a little over the buy point. It seems as if natural gas is being perceived as a "green energy" source. Does this move bode well for E?

Elliott Gue

4:32

Yes, renewable energy is inherently intermittent, so you need to either have a way to store power (batteries are very expensive) or you have to maintain enough conventional fossil and/or nuclear power to balance the grid. So, yes, natgas is the obvious choice because its much cleaner than coal. I think Eni was smart to maintain their investment in E&P and to focus on gas given Italy's historical prowess and experience operating in gas-rich north Africa. Seems their fat 7% dividend yield is covered by cash flows probably as long as oil prices (Brent) averages above $70 to $75/bbl longer term. I think there are probably not a lot of near-term upside catalysts because the stock has performed well, has already benefited from boosting guidance and analyst upgrades and with Europe looking well-supplied with gas to start heating season. Definitely a name we watch on dips though.

John

4:35

Please opine on AEP prospects

Roger Conrad

4:35

Hi John. AEP announces Q3 results and updates guidance on November 2. But we already have a pretty good idea of what to expect based on the 6% dividend increase announced earlier this week--as well as management's reiteration of 2023 earnings per share guidance of $5.19 to $5.39. That's another steady quarter underpinned by regulator sanctioned utility rate base investment, substantial debt reduction with the proceeds of now closed asset sales and reaffirmed long-term guidance growth of 6-7%. I rate the stock a buy at 90 or lower.

Victor

4:37

Hello Elliott,
Last year DVN was doing very well, but this year it’s under-performing. Is it just due to oil prices?

Elliott Gue

4:37

DVN is a quality operator and, certainly, some of the weakness there has just been a function of weakness in oil/natgas prices this year. But DVN shares have underperformed many of its peers, including many of the names in the model portfolio. I think some problems are company-specific, such as gas production in a region of the US that's been experiencing huge negative price differentials to the Gulf Coast -- that's why we've preferred gassy names like EQT/CHK or oily names like PXD (being acquired by XOM), EOG and HES (being acquired by CVX). My view is that DVN will be a good long-term holding but we just prefer other names here.

Ann Rice

4:41

Thank you for providing very helpful information for people like me - alone, elderly - who like to manage their own portfolios. I have relied on your insights, knowledge & recommendations for over 15 years. So far so good. Now I find I have concerns about the Vanguard & Schwab Money Market Funds as a safe, reliable places for money yet to be invested: VMFXX & Schwab Money Market Fund. How long can we expect these 5% returns to last? Will the Gov't "pull the rug out from under us" & slash the rates? Can you notify us when it's time to move back into bond funds as a safe haven for "yet to be invested" money? Thank you again for your fine & unfailing help. With gratitude, Ann Rice

Roger Conrad

4:41

Hi Ann. Thank you for those kind words. I think those returns will last as long as the Federal Reserve continues to push benchmark interest rates higher. As for the government cutting rates--the Treasury obviously would if it could given interest payments consume a record amount of federal revenue. But running deficits means Uncle Sam needs need to attract capital, and that means paying what the market will bear. That said, I do not view money market funds as a permanent place for investment capital. And I intend to deploy the vast majority of the cash in the CUI Plus portfolio into stocks. If you want to use bonds as a short-term parking place for cash, I strongly suggest buying short maturity paper, preferably making purchases through a broker familiar with bonds. I intend to have a number of such recommendations in the November issue of Conrad's Utility Investor.

Victor

4:43

Elliott,
FANG has been a great performer. Do you see this trend to continue? Do you believe that this one could be on the radar for an acquisition?

Elliott Gue

4:43

FANG has acreage at the heart of the Permian Basin and the best acreage in this play has definitely been locked up by a handful of producers. So, a name we like. I do think longer term it could be an acquisition candidate my only concern here is that the obvious buyers are "busy" -- CVX with HES, XOM with PXD. Maybe the European majors would buy it but they're also distracted -- BP with a new CEO, Shell with a shift in strategy...TTE seems cautious about deals. FANG has an enterprise value of $36.1 billion, so it's quite a mouthful for a smaller firm than one of the majors. I actually wonder if we won't see FANG as an acquirer too -- maybe merging with another independent to scale up.

Hans

4:46

Elliott, Since we have CF in one of the portfolios, what is your opinion on OCINF also a fertilizer and Agri. chemical co. Thanks.

Elliott Gue

4:46

I don't follow it as closely, mainly because I am a little leery of the EU ag plays right now. European gas prices are sky high, which boosts feedstock costs, and the EU ag market is -- not sure how to put this politely -- a little Byzantine.

Johnathan

4:48

Thoughts on MO earning report and stock downturn would be appreciated.

Roger Conrad

4:48

Hi Johnathan. I answered a question earlier on Altria and today's selloff, which follows Q3 results and guidance many found disappointing. My view is the reaction in the stock market today was an over reaction to news that really wasn't that dire--a roughly 1% reduction in the mid-point of its 2023 guidance range and slightly lower revenue (-2.5%) due mainly to lower cigarette sales. The company's absorption of the NJOY acquisition is making progress, though that may have disappointed as well. But margins were up 2.9 percentage points, the company generally held or expanded market share in its key segments, free cash flow was solid and there's no balance sheet pressure to speak of. Bottom line: the dividend of almost 10% is still very safe. And on that basis I intend to stick with the position.

Sohel

4:51

Hi Elliot, Thanks for holding these chats. Incredibly useful. With the back drop of recent spike in longer term interest rates is it time to buy into longer dated preferred securities where one gets the benefit of qualified dividends?

Elliott Gue

4:51

I follow some of the preferreds and, in particular, the preferred ETFs. My main concern has been that a lot of preferreds are issued by financials and I am worried about that group here -- I am not sure the steps the Fed took to calm the market last spring have really done much to fix the underlying issues in the sector. I also think that when we get the recession the spreads on preferred/lower rated corporate debt could "blow out."

Victor

4:52

Hello Roger,
Both NEP and NEE are trading under your dream prices (especially NEP). After a significant decline, is this rebound sustainable? For someone who already owns NEP would you add NEE at this level?

Roger Conrad

4:52

Hi Victor. As you can tell from my answers to questions in this chat, I believe Q3 results and guidance demonstrate clearly that NextEra Energy's long-term CAPEX plans and earnings growth are very much intact, despite the headwind of higher interest rates. In fact, the record 3 GW plus of contract orders if anything demonstrate business momentum--as smaller players leave the renewable energy field and NEE adds market share. The company also stated it continues to support NEP as a long-term funding vehicle. So long as the business is strong, I'll be betting on both NEP and NEE to reach new highs in the nest 18-24 months--though both could easily relapse again if a recession triggers a full on market selloff.

Bonnie Beth

4:57

We followed your original recommendation and swapped AQN for AQNU and we no longer own AQN. Should we buy back shares of AQN now?

Roger Conrad

4:57

Hi Bonnie. The AQNU preferred converts into AQN common stock in June 2024--so there's no need to do anything before hand if you want to own AQN. There are three more dividend payments of 96.875 cents per share, the next to shareholders of record Dec 1. The current conversion ratio is 3.333 shares of AQN per share of AQNU--and that will remain the ratio unless trades at $15 or higher at the conversion date. I intend to stick with the AQNU through the conversion into AQN--by which time we should see some action on asset sales, and very likely a higher price for both AQN and AQNU.

Sohel

4:58

Hi Elliot, What your outlook for time frame for the recession at this time? and how deep?

Elliott Gue

4:58

I wrote a piece over on my Substack today re: the yield curve. The bottom line is that yield curve inversions do NOT indicate imminent recession, they indicate the market views Fed monetary policy as tight. In modern cycles, the real recession signal is a steepening yield curve after a lengthy period of inversion -- we are (finally) seeing just that with 10s/2s inverted by just 20 basis points compared to 108 in early July.

So, this would suggest recession likely within the 3 to 6 month time frame.

In inflationary cycles like the 1970s, the yield curve can remain inverted throughout the recession as the Fed fights inflation. However, you still tend to see episodes of steepening (including BEAR steepening), in the early stages of the downturn.

As for depth, I think it's a little early to tell. Conventional wisdom is that it'll be mild because the consumer is in decent shape. The risk, in my view, is that high rates have caused an "accident" in the economy -- some sort of "black swan" or credit event make

Elliott Gue

4:58

the recession more severe than anyone expects right now.

Victor

5:03

Hi Roger,
ENB is in a significant downtrend. Any chance of a reversal or is it just dead money?

Roger Conrad

5:03

Asset acquirers are rarely popular even in the best of times. So it's no wonder that with so many worrying about interest rates and borrowing costs, Enbridge is trading at a fairly substantial discount to other midstream companies in the wake of its proposed acquisition of Dominion Energy's US natural gas distribution utilities. As I said answering a previous question in the chat, I think this deal is very much a win-win for both Dominion and Enbridge. They're going to have to prove it by executing the deal and then following through on stated strategic aims. But i think both stocks will be headed much higher in the next 18 to 24 months at least. That said, ENB and D are likely to trade at discounts until their deal is further along.

Mary

5:08

What does your crystal ball see for the next 12-18 months for VET?

Roger Conrad

5:08

Hi Mary. I think Vermilion shares and its dividend are headed a lot higher as this energy price cycle unfolds over the next 12 to 18 months. Q3 earnings and guidance are due November 1--and the update issued in mid-September are promising for both. Shares are going to follow the price of oil and gas. And right now oil is is under pressure due to concern about demand in a recession. But we continue to rate Vermilion a buy at 25 or less--it's tracked in our Canada and Australia coverage universe, which can be viewed from the EIA website.

5:13

Hi Elliott, what are your thoughts on gold and gold stocks? In Creating Wealth, we own GLD, WPM, and NEM. NEM is close to the next scale-in limit buys that we had previously at $36.50, but canceled and the position is marked as a hold now, indicating some concern. Thanks.

Elliott Gue

5:13

I just posted a summary of my outlook for gold prices in my Substack -- I'll likely be expanding on it more in an upcoming issue of the service as well. The executive summary is that historically gold prices are driven by two main fundamentals -- the dollar and real interest rates. The dollar has been strong and rates have been rising, which means gold "should" be weak; instead, however, it's trading just shy of $2,000 per ounce. When this happens, and it does from time to time, I've found that it pays to sit up and take notice because something else is driving gold. In this case, I think that the market is saying that we're in for an inflationary recession cycle like the 1970s where inflation remains elevated even as the economy weakens. In cycles like that gold and commodity prices actually tend to accelerate to the upside as the economy slips into recession. The trigger I'm watching to tell me such a cycle is indeed underway is for gold to set a new all-time high, closing above the $2,050 to 2,075 region

Elliott Gue

5:13

that's acted as resistance since mid-2020. If that scenario does play out, I think you could see $3,000 gold at some point in the next 12 to 24 months. Right now, I feel like we have adequate exposure to gold via the ETF, NEM and WPM. NEM has had some cost inflation issues and I think the market has been a little preoccupied with their deal to buy Newcrest, so I cut it to a neutral to reflect those risks. If my longer term hypothesis plays out, however, and gold breaks higher, I'll likely be rolling out more recommendations in precious metals.

Alex M

5:15

Hi Roger. What are your thoughts on Eversource (ES) at this level? Increased risk profile due to the wind farm challenges? Still a reliable dividend stock or has that characterization changed? Thanks.

Roger Conrad

5:15

Hi Alex. At this point, I don't see a lot of downside for EverSource from the offshore wind exposure--that's the primary reason for the decline we've seen in the stock since summer and it's fully in at this point in my view. The company had previously made the decision to exit offshore wind generation. And though actions of regulators have seemed to push off development of existing leases--most recently New York by rejecting developers' attempt to negotiate higher prices to offset a 50% cost increase for projects--it's still likely they will proceed with sales. Meanwhile, the dividend and balance sheet are strongly supported by regulated utility earnings. The company has closed the sale of its undeveloped leases to partner Orsted for proceeds of $625 mil. If it can get something close to what's on the books for the remaining leases, the shares are likely to rebound strongly. I expect something less. But from this price, any kind of closure could set off a powerful rebound. Q3 earnings and guidance are Nov 3.

Alex M

5:20

Evergy (EVRG) seems to be underperforming the recent utility bounce. Is this due to the Kansas regulatory climate? Thanks.

Roger Conrad

5:20

I wouldn't read too much into this. For one thing, a lot of the boost in utility averages is due to the rebound in a single stock--NextEra Energy--which carries heavy weight in both price and capitalization weighted indexes. And Evergy did not fall nearly as far as NEE. We'll see earnings on Nov 7--and Kansas regulation will no doubt be a topic of conversation, with the recent rate settlement front and center. But it seems unlikely we'll see any meaningful revisions in either 2023 guidance or long-term growth guidance of 6-8% for earnings. And in any case, the dividend appears well protected with another mid-single digit percentage increase on the way--with Nov 7 the likely declaration date.

5:21

Elliott, small cap stocks have been the worst performers during this correction. VBR (small cap value) has not escaped the carnage. What are your thoughts on this sector and VBR? If we hit our stop at $147.50, would you have more conviction on it and reduce the stop or proceed and take the lost?

Elliott Gue

5:21

My thesis in recommending VBR was that usually when the market experiences a very narrow rally in the first half of the year that rally broadens out to include more laggard groups as the year progresses. Also cash-rich value small caps are very cheap vis a vis large caps and growth stocks. That thesis, however, just hasn't played out and, as I alluded to in the issue on Tuesday, the market is starting to break down right now. Specifically, the S&P 500 closed today far enough below its 200-day MA that I think the prospects for a normal seasonal rally into year-end are fading. So, unless something changes quickly, I am more likely to pull out the recession playbook and to take action by further reducing our long-side exposure and maybe some inverse ETF exposure to profit from further downside into 2024. I use stops as a "check" for my thesis on a stock or ETF and In think my initial bullish thesis on VBR is very much in question right now.

Victor

5:22

After reading your report on HESM I see that you feel good about this one in any possible scenario. For someone who doesn’t have a position would you add this one

Roger Conrad

5:22

I think it's a great pickup up to our highest recommended entry point of 32 or less. BTW, the recently increased dividend to quarterly rate of 61.75 cents per share will be paid to shareholders of record Nov 2.

Sohel

5:25

Hello Elliot, What's your short term outlook for VLO - time to trim? What's the long term outlook?

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