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AvatarRoger Conrad
2:05
Hello everyone and welcome to our members only Conrad's Utility Investor live chat. As always, there is no audio. Just type in your questions and I'll get to them as soon as I can deliver a complete answer. I am alone on this chat, but I promise to get to all the questions before I close out, which today will be around 6 pm ET. You'll be emailed a link to a complete transcript of all questions and answers shortly after the conclusion of the chat. And the transcript will also be posted on the CUI website. Now let's get started!
2:06
Per usual, I'm going to start out by posting my answers to emailed questions we received before the start of the chat.
Q. Does Utility Investor do any partial sells to "take some profits", or is a recommendation such as NextEra Energy (NYSE: NEE) held thru thick and thin until a decision is made to sell it? Thanks—William H.
 
A. Great question. In the January 25 Utility Roundup “Time to Sell NextEra Energy?”, I wrote that I was considering recommending readers place a “trailing stop loss” on this stock. That’s a step I’ve never taken in Conrad’s Utility Investor. And I never did in Roger Conrad’s Utility Forecaster, which founded in 1989 and wrote at my former publisher until May 2013.
 
The main reason is there are just so many ways for investors to get burned. For one thing, a stop loss doesn’t guarantee any particular selling price—just that a sell order will be issued if a certain price level is breached on the downside. If enough sell orders are executed at or around a certain price, the sheer volume may overwhelm the bids and the actual execution price will be well below where anyone set their stops.
 
Unfortunately, trailing stop losses have a way of accumulating at certain prices. So when they’re executed, the effect on share prices can be quite pronounced. I’ll never forget what happened to many holders of Enterprise Products Partners (NYSE: EPD) one day in May 2010. The units of the blue chip partnership opened and closed at almost the same level around $40, but not before nose-diving into the mid-20s that morning as mass execution of stop losses temporarily overwhelmed the market.
 
The only reason I was considering one for NextEra is the stock still enjoys strong buying momentum. But it’s reached a multiple that’s historically been unsustainable for companies in this industry: 30 times expected 2020 earnings per share.
 
2:07
The company has been a key piece of Conrad’s Utility Investor’s portfolio outperformance the past couple years. And the company’s strategy of building renewables plus storage at its regulated south Florida utility as well as across the US through contracts looks healthy as ever.
 
We can’t ignore that NextEra is best in class and leading its sector. But neither can we take lightly that momentum will eventually run out, at which time shares are going to be vulnerable to a substantial pullback even if they maintain a substantial premium multiple relative to the sector.
 
As I indicated in the February issue, the strategy I’ve decided to continue following for NextEra—as well as other highly rated companies that have exceeded “consider taking profit” points—is to advise readers to sell a portion of what they own to lock in a piece of what should be an exceptional profit.
 
The exact amount to sell depends on situation of individual readers. But the general instruction is to reduce shares held, particularly if these are over weighted in a portfolio. 
 
It is possible that I’ll rate some of these stocks outright sells, including NextEra. I did so late in 2019 with Pattern Energy Group (NSDQ: PEGI) with the company trading substantially above its all-cash takeover price of $26.75. But at this point, however, the important thing is just to cut back on any of these companies that (thanks to appreciation) are weighted significantly more than other holdings. 
 
Q. I think Cincinnati Bell (NYSE: CBB) is in play. What does this imply for their preferred units, which I've been holding for years?—Paul N.
 
A. They are definitely in play. The main question is whether the only current hard offer on the table--$10.50 per share in cash from a unit of Brookfield Asset Management (TSX: BAM/A, NYSE: BAM)—will prevail, or if an as yet non-binding $12 per share cash proposal from a Macquarie Bank unit will materialize.
2:08
Cincinnati Bell management confirms with its earnings release today that as of yet the Brookfield bid is still in effect. It’s possible the acquirer will have to sweeten the pot a bit with Macquarie hanging around. But a Brookfield win would clearly be good for the company’s credit, and by extension for anyone who owns fixed income such as the Preferred.
 
I haven’t officially recommended the Cincinnati Bell Preferred B to readers for a number of years. For one thing, earlier in the previous decade I saw limited upside from a price near par value of $50, which is also the call price—the conversion ratio of 0.2884 shares of CBB dates back to a time when shares traded at a far higher price. Then as revenue pressures mounted on legacy wireline companies, I became more concerned about credit and dividend sustainability.
The big bounce we saw in late December last year is the result of Brookfield’s bid. I would view a merger with that company as very positive for credit quality. That starts with the BBB+ credit rating from S&P for Brookfield Infrastructure Partners (NYSE: BIP), which compares to B (creditwatch negative) for Cincinnati Bell.
 
S&P apparently is concerned Brookfield’s all cash bid carries risk of a weaker balance sheet post-merger. I think it more likely Cincinnati Bell debt will get the kind of lift TerraForm Power (NSDQ: TERP) has since a Brookfield unit became its primary shareholder. Cash bid or no, the Brookfield family has extremely deep pockets and a history of driving down borrowing costs at companies it acquires. I think it’s reasonable to assume they’ll do that here, as it would also increase their returns on investment.
 
There is a risk Brookfield would call in the preferreds at some point. So long as you’re not paying more than $50 per share, however, this will actually produce a gain.
 
I’m also a little less sanguine on a bid from Macquarie, which doesn’t quite have the sterling record. And because the preferred is a perpetuity, it’s exposed to some interest rate risk. But at this point, I don’t see a lot of risk to holding onto the Cincinnati Bell preferred.
 
 
Q. A look into the future…are there any technology companies on the cutting edge you would recommend (battery storage other than Tesla, for example)?--Dave P

A. My strong belief is the higher percentage bets on the ongoing energy transition are always going to be the adopters, rather than the developers or construction companies.

This whole thing is basically a race to the bottom. That is, who can build the most effective battery storage, solar panel or wind turbine the cheapest? 
2:09
That’s not the kind of market where the makers of these things can really build margins. Even when the Trump Administration erected some pretty tall tariff walls for solar panel imports a couple years ago, they failed to boost margins in any meaningful way for US producers. In fact, the price of panels has actually continued to drop.
 
But those lower prices have continued to benefit adopters, particularly US utilities and electricity generators who are now deploying solar especially at an unprecedented rate. Southern Company (NYSE: SO) CEO Tom Fanning, for example, was once a staunch defender of the coal-fired power plants that generated more than half the utility’s energy as recently as 2011. Now his company has cut that to just 22 percent while becoming a leading deployer of wind and solar in the US.
The primary reason is cost: New solar is cheaper to build and run than keeping older coal plants running. The company has even sold its 5 percent stake in the Atlantic Coast Pipeline to invest in solar and wind, where it can now earn a higher return and with regulators’ support.
 
Wind, solar and storage are still a relatively small piece of the US energy pie. So there’s a lot of potential room to grow as costs continue to come down. But that benefit at least for now is flowing toward companies using these products, rather than those making them.
 
There are technology developers finding high margin places in these industries, mainly from integrating sophisticated diagnostics into processes and components. Front and center here is ABB Ltd (NYSE: ABB), which had a large presence at last November’s Edison Electric Institute annual Financial Conference. And we also track a number of what we call “Utility Technology” companies in our Utility Report Card coverage universe—which rate buys at the right price.
Q. Question: is this a sign of the bottom?
 
https://www.yahoo.com/finance/news/lord-don-t-buy-oil-172820455.html
 
Ben F.
 
A. When a popular television personality throws in the towel in a major market, it’s always worth taking note. And it’s hard to find a sector feeling the love less than US oil and gas, even as stronger companies are proving their resiliency with pretty solid Q4 earnings.
 
We focus our energy analysis primarily in Energy and Income Advisor. But we do cover a handful of the most conservative companies in CUI as well.
Q. Do you have thoughts on Chemtrade Logistics Income Fund (TSX; CHE-U, OTC: CGIFF) and American Shipping Company (Norway: AMSC, OTC: ASCJF). Thanks—Frank B.
 
A. Your question takes me back to the old days when I ran an advisory called Canadian Edge. We currently cover Chemtrade Logistics in Energy and Income Advisor, along with several dozen other prominent and high yielding Australian and Canadian stocks. The company operates in a business that’s generally cyclical on both price and volume, which means EBITDA can be quite volatile.
 
Management some years ago, however, set the dividend at such a conservative rate that it’s been well covered almost regardless of the ups and downs in the underlying business. The tradeoff has been a lack of growth and after a long period of stability shares came down hard about a year ago, as a number of research houses cut their recommendations from buy to hold on concerns about commodity markets. But I expect to see another round of steady numbers that supports the payout
2:10
when the company announces earnings for Q4 on February 20.
 
I don’t currently track American Shipping Company. But we do have a pretty extensive piece on the shipping sector in the upcoming issue of EIA for those interested.
 
Q. Hello Roger: My question is whether to buy OXY? If so, what price?—Bill G.
 
A. Occidental Petroleum (NYSE: OXY) is another energy company we track in EIA. We’ll see Q4 earnings on February 27. But at this point, we see it as deep value in the sector that would be a buy at a much higher price.
 
Again, this is not the kind of stock we track in Conrad’s Utility Investor. For a more in depth analysis, I would suggest checking out what my partner Elliott Gue has to say in Energy and Income Advisor.
 
Bill Peisner
2:15
For subscribers to your CUI+Plus portfolio would you consider offering "dream price" entries for those stocks?
AvatarRoger Conrad
2:15
That's a good idea Bill, though the way Dream Buys would probably be more useful there would be as a "Watch List" of stocks we might want to buy. I've been managing CUI Plus as an active portfolio, meaning I'm looking for stocks right now that have some momentum. I'm not going to ride anything down to a Dream Buy price if I can help it. But I would certainly look very hard at any stock that sank that low as a potential new position. The closest holding we have to that now is the super major Total SA--I believe the energy sector is cheap and it's a true blue chip.
AvatarRoger Conrad
2:18
For those of you unfamiliar with CUI Plus--it's an actively managed portfolio of income producing stocks that are outside our CUI essential services company coverage universe. I provide recommended share amounts to purchase based on a $100,000 model, which allows investors to size it to their own portfolios.
Barry J.
2:18
AGLXY is currently trading below your dream price of $14. Why has it fallen so dramatically from its $20/share price in January 2017? Do you still recommend purchasing it?
Thanks.
AvatarRoger Conrad
2:20
I do still recommend AGL's unsponsored American Depositary Receipts that trade under the symbol AGLXY at a price of USD18 or lower. AGL is Australia's leading electricity company with a dominant position in generation (increasingly renewables and storage) as well as retail marketing. it does not own the basic wires and pipes, which in Australia remains a regulated business.
2:24
AGL has faced a number of headwinds over the past year or so. There have been ongoing disputes with the ruling National/Liberal party government, which won a surprise re-election over the Labour Party last spring. AGL's strategy of favoring renewables as a cheaper alternative to coal has run afoul of the Morrison government's pro-fossil fuel industry, though it is in line with the most important state governments where AGL operates. The company's new CEO has been much more effective calming these tensions. But the government is still intervening in the country's deregulated power markets to try to control prices, which have risen as LNG exports have soaked up supply.
2:27
What I've been most impressed about is AGL's continued ability to navigate this environment, including updated guidance for fiscal year 2020 (end June 30) for underlying profit to be at the "upper half" of the previously set range. The semi-annual dividend does follow earnings per share--which means it's more volatile than US companies that only cut payouts when the business is coming apart. But AGL shares are cheap at 15.4X full year results and the Australian dollar at barely 67 US cents.I think buying in now may take some patience but from this price point risks are low and upside is great.
Steve F.
2:28
Hello,
Can you expand on the investment thesis for Vistra Energy?
Thanks,
AvatarRoger Conrad
2:34
Sure Steve. Basically, I see three major potential drivers of returns here. First, they are growing their business and generating roughly $2 billion a year in free cash flow while they're doing it. That's enabling them to boost their balance sheet, with the result they have no significant debt maturities until 2023. That cash flow and earnings growth means higher dividends. And it's further backed by enormously successful cost cutting company-wide, particularly from replacing older coal fired power plants with new gas and renewables. Second, Vistra stock is pricing in none of this at just 9.2 times trailing 12 months earnings. Just proving resiliency and the balance sheet--which is on the verge of investment grade this year--should help the stock earn a higher multiple and therefore price. Finally, there's the potential for a takeover--including going private at an upper 20s price.
2:36
The knock on Vistra is it's a wholesale power company and as we know electricity prices have been dropping across the country in deregulated markets--as natural gas prices have dropped and new renewable energy capacity has come on line. In Vistra's most important market, however,--Texas--the market is tightening as coal comes off line. And again, this company is fully participating in the ongoing energy transition, so it's less and less exposed to falling wholesale electricity prices.
Howard F
2:36
would you take profits now on bep  enb  ay
AvatarRoger Conrad
2:39
Brookfield Renewable Partners is now trading above the "consider taking profits" price in our "Trading Above Target" table. I present that table in every issue of CUI in the Portfolio section to identify companies no longer trading below my maximum recommended entry point, as well as stocks where readers should consider selling a portion of their position. That would be my advice now for BEP, which as a stock really has been off to the races over the past year as has literally anything to do with contracted renewable energy.
2:43
Atlantica Yield is now also trading above the price where I would consider taking some money off the table. I am still very interested in what management has to say about its strategic review when they announce Q4 results, which should be at the end of this month. But it's also up nearly 90% over the past 12 months, again on excitement about renewable energy. And it's easy to envision the shares backing off if the news isn't as good as people seem to expect now.
2:45
As for Enbridge, it's not a portfolio company but we do track it in the Utility Report Card as a buy up to 33. That's somewhat below where it trades now. The stock has done well as a defensive bet on midstream and I expect good news when it reports tomorrow. Should that happen, I'll likely raise the buy target on the shares. But it's not yet at a level where I'd consider taking partial profits.
Howard F
2:48
take on shlx and mro as to profit
AvatarRoger Conrad
2:48
These are stocks in the Energy and Income Advisor coverage universe and I invite everyone to check out what we say in there. The short answer is we view both as values. Shell doesn't report Q4 until February 20. Marathon Oil is a member of our Actively Managed Portfolio and the upcoming issue of EIA reviews the generally solid earnings announced this week.
tim
2:52
what do you think about NEP. It's starting to hit 52 week highs almost daily.
AvatarRoger Conrad
2:52
NextEra Energy Partners is now well above our maximum recommended entry point and is closing in fast on our "consider taking profits" point of 60. It's been a huge winner for us and Q4 numbers looked pretty strong. But we also have a big profit in this stock and if we do see a plus 60 price, anyone who's been in there with us the past few years should consider taking some money off the table. it's hard to believe that not long ago one could have gotten all they wanted of this stock in the low 20s!
Maureen Brunner
2:52
I would like to know your current thoughts about Enerplus
AvatarRoger Conrad
2:56
Enerplus is another Canada-based oil and gas producer we track in Energy and Income Advisor and not in CUI. But it is a small energy company I've covered now for almost 20 years and have been continually impressed with management's ability to stay in the game. The current portfolio focused on Bakken oil and Marcellus natural gas properties has proven successful driving down costs to keep the company profitable and consistently generating free cash flow, despite a horrific price environment. I expect earnings that come out Feb 21 to show they're still generating enough operating cash flow to cover CAPEX and dividends. I'm a little concerned about refinancing the 7.97% bonds of June 2021--but apparently the owners of those bonds aren't as they trade at a yield of maturity of barely 2%.
BKNC
2:58
Hi Roger,
AvatarRoger Conrad
2:58
I doubt you're asking about Bank of North Carolina--which after several mergers is now part of Pinnacle Financial Partners. If you are, I prefer AROW (Arrow Financial) in the small bank category.

I
you're not, is there another symbol?
Howard F
3:03
do you think the melt up will last thru the summer
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