LB Thinking: Income opportunities in energy, stocks, bonds, preferred, and an ETF.

Welcome to Left— Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. And today we're talking energy investing for income across investment types with Noland Langford, chief executive at Left Brain Investment Research. You can learn more about the firm and its research at leftbrainir.com. And don't forget that you can check out the Jarvis newsletter, which highlights the insights gained from the weekly outputs of Jarvis, the firm's proprietary research system. You can learn more about that at leftbrainir.com/jarvis. Ir.com/jarvisnewsletter. Nolan Langford, welcome back to Left Brain Thinking.

Hey Chuck, how are you? I'm excited to be back talking investment.

And I'm always well when we're talking about investing, but I really like this one because normally you and I are talking stocks. Sometimes we're talking high yield bonds and with Brian Dress, your director of research, well, we've talked a little bit about preferred securities and some other things. But today we're talking about energy investing, but we're gonna talk about stocks, bonds, preferred stocks, and even an ETF. So explain why energy now and how you decide where you're gonna go with each investment type.

Let's start with energy. As most listeners and investors are aware, energy prices are up and they're up quite a bit. You know, Brian and I were talking in our research meeting on Monday, It's amazing how far we've come in the last 16 or 17 months. You know, early last spring last year, oil prices actually went negative for a little bit. And to think that we sit here today and they're over $80 a barrel is, uh, pretty astonishing. But that's one of the reasons, and only one, we're talking about energy. And the big one is our strategy. And our strategy revolves around acceleration, acceleration in business trends, specifically business fundamentals. When we look at energy, what we've been getting all year long is Jarvis, our securities evaluation application, just keeps ringing the bell and showing us company after company where you see accelerated earnings in sales, in revenue growth, with these businesses getting healthier. And the energy companies continue to show at the top of our charts. So we just go where the data leads us and the data leads us to these energy companies getting healthy, getting better. And we think there's probably a continuing thought that they're gonna continue to get healthy throughout the course of the year. So that's what has us focusing on energy at the moment.

But once you focus in on energy, you're looking in this case for income. You want the kind of income you'd get from high yield bonds, but you're doing it in this case with a stock, with a bond, with a preferred stock, and with an ETF. So tell us where you're finding those opportunities and why each form can come in and work for you.

One of the things with energy is it is cyclical. You know, it goes in cycles. Generally, as a research shop, we tend to steer away from cyclicals. We like dependable revenue growth. We like catalysts, and we like to be comfortable over the long term that there's durability there, and anything but that in the energy sector. Now, nowadays people are worried about inflation, and you know, if you have energy exposure, that's certainly a good way to hedge inflation. So from that perspective, energy holds up. So we have no idea what the future holds for energy prices. However, with the securities that we've selected We feel really good that as long as energy stays range-bound above $60 per barrel, not only are we going to get good income, but we can also see strong price appreciation. But I just want to be clear, it's very different than buying an ENP company and buying it at $50 a share with no dividend, just thinking oil prices are going to over $100 a barrel and that I can double my money in this stock. So this is sort of a middle road, Chuck. We've always focused on two areas at the firm. One is high-growth equities, and then the other area is income securities. So securities that we think pay durable income that can grow it over time has been an area of focus for us, and we've sort of just combined the two— income securities and energy being an area of focus. And we have a few we'd like to discuss because we think they're very interesting and could potentially be profitable for investors.

So let's roll with that. Let's start with the stock.

The stock that we've chosen to focus on is Exxon, ExxonMobil, which probably does not need much explanation from most investors. The stock actually has done very well this year, up over 50% this year. But what most people probably aren't aware of, if you go back in time, it hasn't moved in a very long time. So the market cap here is about $250 billion, but it really has not moved in years. You can go back 5 years ago and the stock's still down from where it was at that point. But we think with oil prices being at this range, at $80 plus, we think the security is priced to move to the upside. They have a dividend that's very close to 6%. They've committed to increasing the dividend. And as long as oil prices stay at this range and go higher from here, there's a lot of upside. So it's probably the least risky way to play energy and just a big stock being quote unquote the blue chip in energy. So Exxon would be the way that we would play it if we were just buying a straight out stock.

And I have to say, I'm happy to hear it because it's in my portfolio. Though it's a stock that I had been wavering about because it had been struggling. So I love the idea that you believe that it's got the great yield and that the yield is safe moving forward, et cetera. And there's the good potential there. So let's move now from a stock to the bond.

So the bond that we like is a company called Genesis Energy and is structured as a master limited partnership, but it's publicly traded. The ticker is GEL. It's about a $6 billion business, and they have two sides of the business. One is a big pipeline in the Gulf of Mexico, so all the oil and liquids activity gets shipped through their pipeline from the Gulf of Mexico back to the continental U.S. And then the other big business that they have is a soda ash business, where they're the largest producer of artificial soda ash. In the world, actually. They've been around for a very long time. The stock itself pays a healthy dividend, but we actually like the bond of Genesis Energy. Of course, the bondholders get paid first and have a claim on assets. So Genesis Energy actually has a very high coupon bond, an 8% coupon bond that matures in the year 2027. So it'll be outstanding for a little over 5 years. If they don't call it early. And at today's price, it prices at about 102. For the listeners, bonds are priced in terms of 100. We call that par. So right now this trade's a little bit over par at 102, but if an investor bought that today and held it for the duration, they would lock in a yield to maturity of about 7.3%. We think that's very, very attractive for a bond.

Absolutely. So now let's move to the preferred stock.

The preferred stock that we like is a company called Energy Transfer. The ticker is ET. It's one of the largest integrated pipeline companies in the country. The enterprise value is about $73 billion. You could buy the individual stock, you could buy its bonds, but what we want to focus on is its preferred stock. Brian Dress mentioned last week when he was talking about preferreds, how they work. I'll give the quick recap. Companies can issue a common stock. Common stocks are at the bottom in terms of getting repaid, and they are the most risky, but they're also the most rewarding. Bonds in the capital structure are at the top, so they're loans to corporations, and in the case of bankruptcy or something goes wrong, those lenders have the first claim on assets to get repaid first. Companies can also issue another security that sits right in the middle It's called a preferred stock. So it's not as risky as the common stock, and preferred stocks don't get paid first in case that something goes wrong. They sit in the middle, so after bondholders. So it's sort of a hybrid security. They tend to pay very high yields because of it. So they're generally issued at par, and Energy Transfer has a Series E preferred. It was issued at $25. Right now investors can buy it at a little over $25. Last time we looked, it was about $25.30. The reason that we like it is because of the income stream. It has a dividend of 7.6%. Unlike bonds— bonds pay income twice a year— preferred stocks pay the dividend quarterly. So you get the income more often. And this one is a fixed-to-floating. So that income, 7.6%, is locked in until May of 2024, and then it switched to a fixed-and-floating structure. So energy transfer, in the case of steady to higher energy prices, we think this is a very attractive income, particularly with where we are at interest rates in this country.

And quickly, an ETF. I've never known you to be saying let's go invest in ETFs, but you found one. Explain what you're looking at.

One of the things that we looked at, Chuck, you know, if you go back 5 years and you take a look at the S&P versus energy, it's been massive underperformance over the last 5 years. The S&P is up roughly 100%. But energy, the XLE, which is the big energy ETF, it's down 20%. If you look at the service companies, they're worse, down 64%. And then the energy ENPs are down about 32%. What we're looking at in the ETF are the pipelines. They don't generally take a lot of energy exposure risk. They get paid based off volumes. All that energy, natural gas, it ships through pipelines. So the pipeline operators just get paid almost like toll takers in terms of volumes going through their pipelines. Historically, those companies have really good returns and good yields, but not the last 5 years. The pipelines as an index, and we're looking at the AMLP, down about 44% over the last 5 years. The point is these energy companies have a lot of catching up to do to catch up with the S&P or even energy prices in general. So AMLP is a basket of pipelines that investors can buy. The dividend yield is over 7%, and we expect these distributions and these dividends to be increasing over time. So you get a two-way go there. You get the upside of price appreciation from the pipelines, but you also get a very attractive stream of income.

Nolan, it's really interesting to watch how you're putting it all together and going anywhere and everywhere. For your ideas. Thanks for sharing some left-brain thinking with us. We'll talk to you again soon.

Thanks, Chuck, and I look forward to doing this again soon.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can learn more about my hour-long weekday podcast at moneylifeshow.com or on your favorite podcast app. Thanks to my guest, Nolan Langford, Chief Executive at Left Brain Investment Research. Go to leftbrainir.com for more information or to sign up for the new Jarvis newsletter so that you can keep tabs on their latest research, but also to find out about the next event in their Fortune Makers series. That's a free virtual seminar that's being held on November 5th, covering ideas that have income streams north of 5%. Again, it's leftbrainir.com and the firm is on Twitter @LeftBrainIR. Left Brain Thinking is available every other Wednesday. Subscribe via your favorite podcast app. And until we don our left brain thinking caps again, happy investing, everybody.