Add Some Energy to Your Holdings

05/14/2013 8:15 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad is starting a new venture, Conrad's Utility Investor, and to introduce MoneyShow readers to the newsletter's strategy, he discusses some of his favorite energy picks.

Nancy Zambell: My guest today is Roger Conrad. Roger is just starting his own business with his new newsletter, Conrad's Utility Investor, as well as a couple of others. Congratulations, Roger!

Roger Conrad: Thanks, Nancy!

Nancy Zambell: I know that it's tough after so many years. You were, what, 24 years as an editor over at KCI?

Roger Conrad: A pretty long time, and a lot of areas I went into. It was a good time to learn about a lot of things, and now we are trying to get something going on our own.

Nancy Zambell: I saw a nice article that Mark Hulbert wrote, talking about your track record and how great it is. Of course, those of us who have been in the business a long time are very aware of that, and so we are very excited about your new publication. Why don't you tell me what you and Elliott Gue are doing?

Roger Conrad: We have three different publications that we are launching. One is Energy and Income Advisor, and this will be combining what we have been doing in other publications, with subject areas in Canada, master limited partnerships, energy, and other global issues of that nature.

We also have Conrad's Utility Investor, and that will be more or less continuing what you talked about, which was the Utility Forecaster that I had written for many years. I think that is a very good area of the market—for people to be involved in the essential services.

Our third product will be Capitalist Times, and that will be more of a broad-based publication. We will be looking at viewpoints of a lot of editors. We will have a growth and an income portfolio. So I think that will be sort of a nice compliment to the other two letters.

Nancy Zambell: It sounds great! What do you think of the market now? We just keep reaching new records. How long can this last?

Roger Conrad: I think it has very much become a bifurcated market.

Just concentrating on the dividend-paying side, you have a number of companies that have really attracted a lot of buying from investors who want some higher yields than what bonds have, but want to maintain a certain degree of safety. We have seen these types of companies really just take off. And on the other side, a lot of other companies have been left out of the market.

One thing about a slow economy: it does leave room to grow, and it does mean little inflation. So that gives the overall market averages a chance to grow. It also means that dividend-paying stocks are very attractive, but it also means that there are pitfalls that companies can drop into.

And when a company does fall out of favor by dropping into a pitfall or disappointing in any way, stocks have come down. We have seen that happen with a number of stocks that actually didn't report results that were that bad at all, really come down in a very huge way.

It's a very dangerous market. I think that the higher that things go, many stocks are at risk. On the other hand, there is also some value out there, in companies that have just been left out of the rally for one reason or another.

Sometimes we believe that people have overestimated the risks in certain companies. There are pockets of value out there, stuff worth buying. There are also a lot of companies—even very safer ones in terms of operations—that really don't have a whole lot of dividend risk, that are going to continue growing their payouts.

Some have reached prices that are so high that it looks like there is some downside; there is plenty of room for disappointment. That is pretty much where we are. It is hard to believe, but we are over four years into a pretty explosive bull market.

There have been a lot of ups and downs along the way, but a lot of stocks are at all-time highs—many of our favorites. It's been a very good time. I think it is time to be a little bit cautious, and certainly very discriminating.

Nancy Zambell: That makes a lot of sense. Now tell me, what do you think about the MLP sector now?

Roger Conrad: Pretty much the same thing is going on there. There are a number of companies that we think are fairly interesting.

One that seems to periodically get bashed in the press, but we think is very solid, is Linn Energy (LINE). It has actually come off to some extent. It's a producer that hedges a lot of its production, so it has a very steady cash flow.

There is a little company that we have recommended that has done extremely well, particularly this year, called Genesis Energy (GEL). They have increased their dividend at a better than 10% rate, something like 25 out of the last 30 quarters. It's a fairly impressive record.

But if you look at its performance since the beginning of the year, it's up nearly 40%. It is due for a rest, we believe. There are some stocks out there that look pretty good to us, and there are others that I think have really been bit up to the extent that it won't take much of a disappointment to bring them down.

Nancy Zambell: Are there any utilities that you like right now?

Roger Conrad: Again, the same kind of story there. There are a couple out there I think that are still fairly inexpensive.

Look at the Dow Utility Average, and you see it really just blasting off—not quite taking out the old highs. But if you take out some of the companies that are more leveraged to the economy who are selling wholesale electricity, then you are well past all-time highs. That is what an average does. It kind of filters some in and gives you sort of an overall, but it does mask huge divergences.

There are a few out there that I think are still fairly attractive. Entergy (ETR)—a major nuclear power producer—is anchored in the mid-south of the country, a pretty solidly growing area, with a lot of upside with its petrochemicals business.

This is a company that also has a large transmission system. It is in the process of thinning out and merging, and that could be a deal worth as much as $10 to $12 per share for investors. So there's a real pocket of value there.

On the other side of the coin, companies like Duke Energy (DUK), that seems to have overcome much of its troubles, has had a really big run over the past several months, and that is somewhat uncharacteristic for utilities.

These things are going to follow their dividend growth over time. And when they tend to outpace that growth, the share prices rise faster than the dividend growth. In other words, you tend to get a situation where you see pullbacks, and that is the case with many of these utilities now.

Again, it is a time to look for pockets of value, and not so much at the average overall.

Nancy Zambell: Are you going to do anything in alternative energy? The solar companies have done really great year-to-date, but that is also a risky, more speculative area. I don't remember that you have followed many of those.

Roger Conrad: I will tell you the part of that business that is attractive to me right now, and that is the contract part. There has been a little bit in the press about this business model, where companies install solar panels for people. They then realize rents on those panels over a period of years.

What you have is something similar to what a utility or unregulated power producer does-building a power plant or facility, and then realizing cash flow from that, or rents over a period of years. That is, I think, an attractive part of the business. And that is what I look for—for alternative energy in general—is just long-term contracts. And I like to see the cash flow.

Nancy Zambell: Are there any particular companies in that arena that look promising?

Roger Conrad: There are a few that I have heard of that are trying to start up on that model. Right now, for investors, there is kind of a limited fare.

New Jersey Resources (NJR) is a gas utility that has been doing this type of business. We are also seeing some larger utilities like NextEra Energy (NEE) and Duke Energy following this same sort of model. I think that we are going to see some pure plays out there in the near future.

Right now, if you like that business model of renewable energy that gets the tax credits, your best alternative would be something that is involved more in wind or even hydro—companies in Canada such as Brookfield Renewable Energy (BRPFF) or Energixs (Tel Aviv: ENRG). Those are companies that are, again, operating on that model.

I think that some of these solar things will be interesting at some point though, and again, I think there will be some pure plays coming out in the market in the very near future.

Nancy Zambell: Thanks for those recommendations. You are going to be at the MoneyShow in Las Vegas next week.

Roger Conrad: Yes! I am really looking forward to that. We have just started this new venture. I really want to talk to as many people as possible about it.

Both Elliott and I have a number of presentations. We also have a booth there that we will be pretty much hanging around throughout the show. I have always enjoyed Money Shows, and it has always been a great place for me to see familiar faces and meet new people and show people the kind of stuff that we do. We are a small company, and this is an ideal venue for us. We are really looking forward to that.

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