2020 Outlook for Boosting Portfolio Growth and Income Roger S. - - PowerPoint PPT Presentation

2020 Outlook for Boosting Portfolio Growth and Income

Roger S. Conrad Conrad’s Utility Investor Washington D.C. AAII January 2020

Briefing Objectives

• Capitalist Times: Low Risk, High Return

Strategies for Every Investor

• The Big Picture: Investing for Income in 2020
• Dividends Plus: Tactics and Strategies
• Sectors for Your Personal Watch List
• Picks and Pans for the Long and Short-Term
• Q&A

The CT Team

• A Century of Combined Professional

Experience Picking Stocks and Calling Markets

• Varied Client Base—Individuals to RIAs,

institutions and fund managers

• Wide range of experience on all sides of the

investment business—”Newsletter” advisories to major bond trading firms and fund boards

Tailored Strategies for Investors

• Conrad’s Utility Investor
• Deep Dive Investing
• Energy and Income Advisor
• Pig Versus Bear

It Was A Very Good Year

….Though Not So Much for Energy

Benchmark Rates Went Lower….

…But Growth Drove Stock Prices

Year S5TELS DJUA BBREIT ALERIAN MLP S&P 500 TNX 2019 32.7 27.3 27.7 6.3 31.5

• 28.6

2018

• 12.5

2.0

• 4.6
• 12.4
• 4.4

11.7 2017

• 1.3

13.3 9.0

• 6.5

21.8

• 1.7

2016 23.4 18.2 9.0 18.3 12.0 7.8 2015 3.4

• 3.1

3.2

• 32.6

1.4 4.6 2014 3.0 30.7 29.1 4.8 13.7

• 28.2

2013 11.5 12.7 2.4 27.6 32.3 72.3 2012 18.3 1.6 18.6 4.4 16.0

• 6.1

2011 6.6 19.7 8.1 13.9 2.1

• 43.4

2010 19.0 6.5 29.5 35.6 15.1

• 14.0

2009 8.9 12.5 29.2 75.7 26.5 71.3 2008

• 30.5
• 27.8
• 37.9
• 37.1
• 37.0
• 44.4

Key Question: Recession Ahead?

• US and global economy apparently slowed in

2019 from 2018

• Manufacturing contracting with PMI under 50

since spring 2019

• Uncertainty from trade disputes though some

agreements reached

• Capital spending lags

US Manufacturing PMI

January 20 10

But Not There Yet

• Our 10 point Deep Dive Investing recession

warning checklist still has only 2 indicators flashing red: Full Discussion this month on our “World As It Is” Roundtable

• No Recession = No Bear Market
• Capital Spending Lags but there’s money

Macro: Conference Board LEI, MoM

Tracking for zero or negative readings in at least three of the past six months

Market to Force Investment Rebound?

January 20 13

Whither the Fed and Rates?

• “Effective” Fed Funds rate well below 2%
• Fed has all but abandoned “Tightening” for

now, unlikely to resume in an election year

• Inflation still a no show
• Markets have gotten used to disruption
• Income stocks can perform well when Fed

tightens if economy is still growing

ETFs Are Changing Market Structure

DJUA Valuations: Flashing Yellow

Year P/E Yield Pr/EBITDA Pr/Book EV/Sales 2020 22.8 2.9 8.36 2.36 5.01 2019 22.8 2.9 8.36 2.36 5.03 2018 17.5 3.4 8.26 1.92 3.90 2017 18.7 3.3 6.46 2.01 3.82 2016 17.7 3.4 7.26 1.91 3.61 2015 16.2 3.7 5.17 1.67 3.10 2014 18.1 3.2 5.94 1.88 3.09 2013 16.7 4.0 5.30 1.63 2.84 2012 15.1 4.2 4.71 1.56 2.60 2010 12.7 4.3 3.95 1.51 2.21 2009 12.5 4.2 4.09 1.56 2.18 2008 11.6 4.4 3.56 1.54 1.86 2007 17.2 2.8 5.55 2.39 2.39 2002 10.1 5.3 2.67 1.34 2.10 2000 23.5 2.9 5.14 2.45 0.88

Income Investing Outlook

• Valuations/Investor Expectations back to all-time

highs, disappointment can be deadly

• Economy/Earnings are primary drivers of investor
• returns. The Fed and interest rates are only

important as they relate to growth

• No Recession yet, full-on bear market is unlikely

without one

• Expect wide momentum swings, even in so-called

low Beta stocks

• Stock picking will beat index investing in 2020 as

it did in 2019

CT Income Strategies

• CUI Plus
• High Income Energy
• High Income Options
• The REIT Sheet
• Utilities/Essential Svc

IN QUALITY RATINGS WE TRUST

• Dividend Growth and Sustainability
• Revenue Reliability
• Regulatory/Legal Relations and Risks
• Refinancing/Financing: Need for and Access to

Low Cost Capital

• Operating Efficiency

One hand washes the other….

Under no circumstances will we…

• Buy and forget or “Hold and Hope”
• Chase the highest yield or ignore valuation
• Chase momentum or run from it
• Load up on hot sectors and stocks and ignore
• ut of favor investments…and vice versa!
• Not hold some cash

Sector Selector

What’s Hot in Income

• Equity REITs
• Financials
• Investment grade bonds
• Non-MLP Midstream
• US Regulated utilities

(Electrics, nat gas, water)

• Renewable energy
• Selected industrial stocks

What’s Not

• Energy MLPs
• Most non-US utilities
• Most Mortgage REITs
• Resource companies
• Smaller telecoms
• Super Oils

Own Them All

Diversification Means…

• Since no one position can do real damage, you

can afford to take more risk with individual investments, thereby capturing more income

• Outperformers balance out underperformers

in a typical market environment

• You still have to do the work to maximize

returns by finding the best buys at the best possible prices

Utilities: New Highs this Month

Outlook: Utilities

Positives

• Companies in most states

are on the same page with their regulators

• Underlying businesses are

the healthiest in decades, CAPEX spurring earnings and dividend growth

• Trend is for laggards to close

valuation gap with sector leaders Negatives

• High Valuations for top

quality stocks means easy to disappoint expectations

• ETFs dominate many names

increasing volatility, momentum has impact

• Election year politics

elevate risk

Primary Growth Driver

Is NextEra A Growth Stock?

• Certainly priced as one at 28.8x consensus

expected 2020 earnings per share

• Premium to the S&P 500 at 18.9x, DJUA 20.8x
• Guidance growth 6-8%/yr below S&P 9.9%
• Paying premium for safety not unknown,

especially almost 11 years into a bull market

• Valuation probably lasts as long as wind/solar

adoption is a hot investing theme

Exelon Corp (NYSE: EXC)— Loaded Laggard with Early 2020 Drivers

Yield = 3.14% Dividend growth rate 5%, next increase Jan 28 2018 YTD Return: 4.1% Why the underperformance: 1. Wholesale market exposure has pressured profitability of nation’s largest fleet of nuclear plants last few years 2. Company caught up in federal investigation of Illinois state officials, may threaten state’s pending Clean Energy Jobs Act despite support Why a recovery: 1. Illinois still likely to pass CEJA, has broad

• support. Would allow company to keep

all nukes open in the state for at least the next several years 2. Illinois would exit PJM with CEJA, other states likely to follow suit to avoid Trump FERC policies, will advantage nuclear 3. Regulated utilities thriving and growing from nuclear unit’s free cash flow 4. Dividend increase next month 5. Stock at 14.2X 2020 EPS guidance.

Big REITs Running on Empty?

Outlook: REITs

Positive

• A wide range of businesses
• rganized under REIT

structure

• Growing economy is good

for business and dividend growth

• Bargains still available

among niche, lesser known and smaller REITs Negative

• Industry leaders in

traditional REIT areas are priced at historically high valuations

• ETFs dominate many names

increasing volatility

• Most are exposed to a

potential recession, however unlikely, and aren’t priced for the risk

Brookfield Property REIT (NYSE: BPR)—Unique Niche with a Big Yield

Yield: 7.14% 12-Mo Dividend Growth: 4.8% Market capitalization $1.2 bil, BBB- stable credit rating Parent Brookfield Asset Management

• wns 18.53% and is key sponsor

Key Growth Drivers: 1. Demonstrated record of success repurposing floundering retail and

• ffice properties, most recently

the former General Growth Properties’ shopping centers 2. Dividend increase in early February 3. Demonstrated ability to access capital with conservative financing strategy 4. Well covered distribution with 25.6% last 12 months payout ratio.

Outlook: Midstream

Positives

• Best in class have had 5 years to

adjust to lower for longer oil and gas prices and softer shale output

• Dividend coverage is highest and

debt leverage the lowest in at least a decade

• LNG exports and lack of

infrastructure serving key basins still offer enormous investment

• pportunities
• Challenges building new pipelines

elevated value of existing ones

• Proving resilience in the stress test

ensures windfall gains from current price levels

Negatives

• Still too many midstream

companies in US

• Ongoing stress test caused by

reduced output from shale producers is likely to trigger more distribution cuts and even bankruptcies and liquidations

• Investors distrust the MLP model

and dividends paid by midstream companies in general

• Most have high cost of capital

and exposure to commodity prices

Energy Transfer LP (NYSE: ET)— Hard Adjustments Finally Shape a Winner

Yield = 9.04% Distribution frozen since Feb 2008. ETP payout cut twice after merging with SXL and ETE Return since 6/30/14: -33.6% Why the drop: 1. Energy Transfer family overbuilt and

• verleveraged in boom times and paid

the price with 2 deep ETP distribution cuts since oil cracked under $100/bbl in mid-summer 2014 2. Chairman/Founder Kelcy Warren’s reputation is tarnished 3. Investors irrationally fear potential takeover/conversion to corporation Why a recovery: 1. Company looks poised to deliver strong results through the midstream stress test this year and cash flow rises with new assets coming on stream 2. 2019 coverage ratio of nearly 1.9X means company is largely self-funding its growth and able to cut debt as well 3. Distribution increase looks likely this year 4. A possible takeover offer would be at a high premium to current price.

Other Sectors of Interest

• Big Telecoms—Yields plus 5-G
• Renewable energy—Valuations stretched for

some (BEP) but still plenty of adopter bargains

Renewable Economics Add Up

YOUR TURN

CALL SHERRY: 1-877-302-0749 9-5 ET, M-F SERVICE@CAPITALISTTIMES.COM AAII Special Offer for Conrad’s Utility Investor: Type in Discount Code “SAVE399”