Joel Litman’s Altimetry is selling subscriptions to his Hidden Alpha ($49 first year, renews at $199) newsletter right now, with a very similar vibe to a lot of Porter Stansberry’s recent work… the overarching message is, “The US will become a massive LNG export power, and that will lead to Joe Biden getting re-elected and building an even bigger and more socialist government.”

And, of course, that it will happen at a specific point, because newsletters need to have some sort of date or deadline in their teaser ads to make it seem real… even if they have to make up the date. Litman’s headline says, “This July 25th Gov’t disclosure could make some Americans much wealthier — but shift us more towards Socialism than ever before.”

It makes sense that the ad has a similar vibe to Porter’s latest “Forever Term” pitch, which is also about Biden and LNG… it was Litman’s partnership with Stansberry Research a few years back that created Altimetry, a publisher of newsletters and data products that are informed by Litman’s Valens Research. Litman’s focus has long been on providing adjusted “uniform accounting” numbers that he believes provide a more accurate picture of the financial health and prospects of a given company.

Who knows, maybe they even hired the same ad copywriter. We do know that getting people riled up about politics is one time-tested way to catch their attention, and, if the pitch happens to have similar political leanings to you, establish some rapport between the newsletter pundit and the reader, and that connection helps inspire people to pull out their credit card (historically, the core investment newsletter consumer has been a 50-70 year old relatively affluent white man, which is also a group that tends toward conservatism and voting Republican).

But anyway, what’s the story this time?

Well, the July 25 part is history… not a deadline for you to get excited about. That’s a reference to the fact that on July 25, 2022, the Energy Information Administration reported that the United States had become the world’s largest LNG exporter in the first half of 2022, with exports growing 12% year over year as demand rose in Europe and expanded US production capacity came on line.

The “government is going to get bigger and more socialist” part comes largely from comparing what Litman says will be an LNG boom to the first oil boom in the early 1900s, which led to funding Teddy Roosevelt’s Square Deal and Franklin Roosevelt’s New Deal, among other things, and instituting and growing the income tax to pay for an expansion of government. Here’s how Litman tells the Teddy Roosevelt part of that story:

“His own party stood against progressive ideas. But powered by a huge oil discovery and a booming economy, Americans began to demand their government do more. Our sudden wealth changed the political mood.

“It’s hard to believe how popular these views became… and how they transformed Teddy Roosevelt’s presidency. He became the most popular sitting president ever. He was, in a way, more like a European dictator than a U.S. statesman.

“And by then, most of his ideas had been taken over by the Democrats. Woodrow Wilson, for example, changed the Constitution to pass an income tax. And he set up the Federal Reserve, moving America toward paper money….

“Why did Americans suddenly embrace bigger government, led by a charismatic demagogue?

“The answer, of course, is energy… and back in the early 1900s in America, this energy came in the form of oil.”

So that’s the basic spiel here: The US will be the major beneficiary of a global boom in natural gas usage, with huge wins for investors to come as we take advantage of both our vast natural gas reserves and our world-leading natural gas infrastructure. And it will lead to another leap forward in government spending, which voters tend to love (they may not love the “pay for it” bit, in terms of higher taxes or inflation, but politicians have spent most of my lifetime, and especially the past 25-30 years, promising that we can have it all without anyone having to pay for it, and lots of people believe that).

A natural gas boom does make some logical sense, though one should hesitate to rely too much on logic if you’re counting on politicians to choose the best strategy. I’d agree that natural gas is likely to be the easiest “bridge” fuel to a greener future, as it provides much cleaner electricity generation than coal (burning coal still generates more than a third of the electricity the world consumes, and more than 20% of US electricity), and provides some optionality for an easier transition to hydrogen fuel cells, in case that ends up being the key electricity storage technology that eventually weans us from burning stuff to fill our power grids. We can’t know the future, we can’t know when or how quickly new technologies will evolve (nuclear fusion, better battery technologies, etc.), but usually that society-wide kind of change ends up being pretty slow (it will probably be at least a couple years before 1% of the cars on the road in the US are electric, for example). I agree that natural gas should probably be the core strategy for keeping our lights on while we wait for windmills and solar panels and batteries to improve.

Not everyone sees the same logical path, of course, and opinions differ pretty widely. And humans tend to respond to incentives, not to strategic imperatives — cheaper oil made it easy for us to be far more wasteful in getting things we perceive as better, safer or otherwise preferable (bigger and heavier cars, more plastic everywhere); building more roads to ease traffic to the suburbs usually inspires more development and creates more traffic, etc.

And, of course, all politics is local. A lot of people don’t want to live near liquefied natural gas facilities (or pipelines or gas wells), which is mostly why we’ve failed to keep up in building pipelines and infrastructure for natural gas here in New England, where I live (we’ve closed our aging nuclear plants recently, and closed down coal plants more than a decade ago, but politics has blocked any pipelines to import more gas from the Marcellus… so we rely in part on LNG imports in Boston Harbor, which is why Porter pitched his “Boston Blackout” story over the past year, though we’ve so far been spared any real consequences because of an unusually warm winter).

The US Gulf Coast is culturally accustomed to giant petrochemical complexes and drilling and fracking activity, especially in Louisiana and Texas, but in Western Pennsylvania, home to the first real U.S. oil well (Titusville was 40 years before Spindletop), the population density has grown and expanding natural gas production is still more of an open question. Perhaps money and local jobs win the day, they often do — and it’s not lost on anyone that Pennsylvania is one of the key “swing states” in US politics now, or that new PA Senator John Fetterman helped Joe Biden win the state… partly, perhaps, because he flipped from a fracking opponent during the primaries to a pro-gas/energy independence guy during the general election.

We’ll see — it would probably take a big and open political push to encourage more natural gas pipelines and cleanly explain the political and energy strategy. Somebody needs to put a big, fat finger on the scale if we’re going to get to the point where we can export a lot more natural gas (or even move more of it to non-producing areas like New England, or the western states), but the anti-pipeline sentiment is very strong almost everywhere, and has been for a long time, and doesn’t really care whether it’s an oil pipeline or a gas pipeline. Maybe Joe Biden will end up being the one to put that finger on the scale and push for new LNG export capacity, or more new pipelines, we’ll see, but that seems to be the big rationale from Litman here.

So that’s the big picture: The US takes energy leadership in the world by exporting tons of natural gas. That export capacity has been growing slowly over the past decade, but it is growing, and there are plenty of new facilities that are proposed (and in some cases even permitted) but not financed or built just yet, so there is potential, at least in Louisiana and Texas, for a meaningful increase in LNG exports over the next decade. There’s also the potential that these plants might NOT get built without a big “finger on the scale” from somebody — a LNG export facility, which is a collection of liquefaction “trains” that compress and cool natural gas into liquid for shipping in pressurized tankers, is a huge and expensive and complex project to build, any new one will cost billions of dollars and likely take 5-10 years to build.

That means planning for these kinds of facilities requires both massive financing and somebody to take the risk of betting on what the natural gas market will look like not just this year or next year, but in 2030 and 2040, when any big project built now could easily still be paying off its construction debt. Growing our LNG export capacity makes logical sense, given how the world looks right now, with Korea, Japan and much of Western Europe looking for relatively clean gas and trying to avoid being dependent on Vladimir Putin… but nobody knows what Russia, the world’s second-largest source of natural gas, will look like in ten years, and U.S. energy companies are also generally being pretty wary right now, focusing on profitability rather than massive capital projects, because it’s not entirely clear to anyone what the slope of “green” energy will look like.

Logic is good, but this isn’t an area where I’d have any “bet it all!” certainty about how the world changes over the next decade.

Litman (and Stansberry) seem quite convinced, at least, and we know that Porter Stansberry has used that logic to promote a couple companies in this space — the largest US natural gas company, EQT (EQT), which is based in the Marcellus, and the smallest “pure play” LNG project available in the stock market, the not-yet-completely-financed Driftwood LNG export facility being developed by Tellurian (TELL).

And to be clear, Litman doesn’t say that he thinks Biden will have to become an LNG cheerleader… he just has to not try to block new projects. Here’s how he puts it:

“The beauty of this situation is: Biden doesn’t have to “do anything” except stay out of the way, like he is doing right now. He doesn’t have to pass new laws or executive orders.

“Remember, today we have eight LNG export terminals up and running. There are five more under construction, another 12 more facilities already approved but not yet under construction, and another eight moving through the application process.”

But what specific investments is Litman touting? He hints at a couple of them, so we’ll see what we can find… here’s a little more from his spiel:

“Today we produce about 23% of global LNG demand. But export volumes will go much higher from here.

“Get this: U.S. natural gas exports grew 100% between 2019 and 2021, and I think they’ll easily grow another 100% from here. That’s probably a dramatic understatement when you realize we are increasing the number of LNG export facilities by probably 300% or more in the years to come.”

He even calls upon everyone’s favorite avuncular billionaire as an example…

“Warren Buffett, who many consider the best investor in history, is making some of his BIGGEST INVESTMENT bets EVER… in American LNG.”

That’s probably a bit of an exaggeration, Buffett has invested more in oil companies of late than into gas-focused companies… but Berkshire Hathaway does own quite a few natural gas pipelines around the country, including some bought from Dominion Energy back in 2021, and as a result of that Dominion deal they also operate and own 25% of the Cove Point LNG export facility in the Chesapeake Bay (that’s quite small compared to the big plants in Louisiana and Texas, and it may not be politically feasible to expand it, but it’s still important as the only real LNG facility on the East Coast).

And apparently Buffett is not the only one:

“I’m talking about people like Jeremy Grantham, Paul Tudor Jones, Joel Greenblatt, George Soros, Jim Simons (the best investor of all time who averaged 50%-plus gains a year for 20 years), Ray Dalio, Carl Ichan (sic), and Steve Cohen (owner of the NY Mets) are all doing the same thing.

“These folks are all buying the same American LNG companies I’m going to show you how to own today.”

The first recommendation Litman makes is the “freebie” — he says to buy Baker Hughes (BKR), which used to be part of General Electric and is a major energy industry contractor, from making gas turbines (including hydrogen-fueled turbines) and subsea production equipment to providing drilling and fracking and reservoir management equipment and services. Here’s what he says:

“Today you can buy Baker Hughes, one of America’s best LNG equipment service companies, at a super-low price. We conservatively expect gains of 100% or more, plus huge dividends along the way.

“Again, the stock symbol is BKR, and we recommend you buy the company up to $40 per share.”

That’s a big company (market cap about $30 billion), and has been through a few pretty flat years, but analysts do see them getting earnings growing again this year. The stock is trading at about 20X 2023 earnings estimates, pays a dividend of about 2.5% (growing very slowly), and they just reported a slightly disappointing fourth quarter but the stock has held up fairly well. You can go to BKR’s investor presentation here if you’d like to hear their story.

And what about the ‘secret’ stocks he hints at? Let’s see what the Thinkolator can identify:

“The next step I strongly recommend you take is to build what we consider ‘The Perfect LNG Portfolio’ of U.S. firms that gush cash in this Shale Renaissance, and should provide extraordinary gains over the next few years and beyond.

“For example, one of the companies in our Perfect Portfolio is one of the biggest natural gas pipeline operators in the U.S. Get this: About 50% of America’s natural gas headed for export touches this firm’s pipeline.

“We expect the price of this company to soar in the years to come, and along the way, you should receive huge cash dividends, which are approximately 6% of the share price as I speak.

“One thing I love about this company is how management’s incentives are aligned directly with yours. The CEO earns a salary of just $1, so like you, he only makes money when the share price goes up and big dividends are paid.”

That’s Kinder Morgan (KMI), and yes, founder and CEO Richard Kinder does indeed take just $1 in total compensation (though Steven Kean, President and Chief Operating Officer, earned $30 million last year, so it’s not like they’re being unusually frugal across the board… it’s kind of like Warren Buffett taking his $100,000 salary, but also paying his two likely successors about $18 million each/year).

Kinder Morgan is nicely profitable, trades at about 15X earnings, and is a little bit less confusing than some of the big pipeline companies because it’s a corporation, not a mater limited partnership (MLP), but the general strategy is the same as most of the big partnerships: distribute all of the earnings to shareholders in the form of dividends.

Their dividend is at 27.75 cents/quarter right now, and it is supported by roughly 30 cents in earnings as of last quarter (for the trailing year, the dividend and the earnings are essentially the same numbers), so that provides a dividend yield of about 6.25% at the current $17 share price. The yield is a bit smaller than the biggest MLPs like Enterprise Products Partners (EPD) or Plains All American (PAA) or Energy Transfer (ET) offer (they’re all in the 7-9% range), and they don’t offer the same tax benefits as MLPs do to some people… but you also don’t have to deal with K-1 forms on your taxes, and you get a company that has a little bit more flexibility (MLPs usually distribute the maximum amount of cash, which gives them limited capacity to reinvest in growth or maintenance; KMI distributes all of their earnings, but not necessarily all of their cash flow). That doesn’t always work to investors’ benefit, but sometimes it’s nice to have the flexibility.

For what it’s worth, here’s how KMI compares to the average pipeline partnership — this is the total return for KMI over the past decade, compared to the total return for the Alerian MLP Index ETF (AMLP), which owns most of the big pipeline MLPs… those two big downturns followed the decline in oil in 2014-2015 and the sudden destruction of oil demand during the COVID shutdown, so even though pipeline operators aren’t technically “commodity price” bets, they’re really more like toll roads that charge a fee for moving product, they don’t avoid the commodity price risk entirely:

If there’s a lot more natural gas moving, then KMI will probably be a good bet. As will most of the pipeline partnerships.

Next?

“Another company in our Perfect Portfolio controls some of the best properties in the Marcellus and Utica developments. I mentioned earlier how these properties combined are the biggest energy reserve in the world.

“And I believe this firm is set to make a fortune in the years to come. One of the big reasons is because unlike so many other natural gas firms, this firm did not ‘hedge’ future earnings.

“You see, many companies like to “lock in” future prices, so they know exactly how much money they’ll make. This company, however, has removed all hedges for 2023, so if LNG prices rise as we expect, their gains will soar.

“We conservatively estimate 300%+ gains in the coming years, and that’s not including dividends.”

Well, we know that’s NOT EQT (EQT), which is the largest producer in Appalachia… EQT has hedged about 2/3 of its production for 2023, and has already hedged about 10% for 2024. They’re fairly conservative and cautious, it seems, and I guess they would rather guarantee a sustainable profit than bet on the price. Which other Marcellus/Utica producers could Litman be looking at?

There are a few potential big operators in that area who could fit — the reasonable candidates would include Range Resources (RRC), which is really just in the Marcellus, or CNX Resources (CNX), and it might even be Southwestern Energy (SWN), but the best match here is very likely Antero Resources (AR), which has probably been the most aggressive large company at reducing their hedging exposure late last year.

On the hedging front, though, one has to be careful what one wishes for. Antero has lately talked more about remaining unhedged for 2024 instead of 2023, mostly because of the expectation that LNG exports will pick up a bit in 2024 with some new facilities and expansions coming online, but most gas companies got clobbered in 2022 because they hedged production (so they didn’t enjoy the full benefit from the Russian invasion and the big spike higher in gas prices), so many of them cut back on hedging at just the worst time, leading them to be unprepared for the fact that natural gas prices are now falling to pretty close to the production cost for a lot of operators.

Still, the fact that gas prices have fallen so far, and are back near the production cost for many operators, is itself a likely positive for the gas price this year — as with most commodities, the cure for low prices is low prices… and the cure for high prices is high prices. The former causes production to be reduced, which increases prices… the latter causes production to increase, which reduces prices. All else being equal (which mostly means, “if demand isn’t artificially increased or reduced for some other reason”).

So we’ll stick with Antero Resources (AR) as our best match there, but we can’t give it the 99%-certain stamp like we usually do. They are cheap, like most energy companies right now, with a PE ratio in the range of 5-6 or so, and they do have plenty of reserves and drilling inventory to ramp up production if the pricing environment improves. The Marcellus/Utica producers have an inherent disadvantage when it comes to LNG exports, since their natural gas mostly has to travel from Appalachia to Louisiana to be exported, and that pipeline transport adds a little to their marketing costs, but if industrial activity and gas demand do heat up in the rust belt, that would help. As, of course, would a colder winter on this side of the Mason-Dixon line.

And that’s all we’ve got this time, those are the only two positions from the “Perfect LNG Portfolio” that Litman hints at, so beyond a pipeline operator and a natural gas producer you’re on your own for the other three. Perhaps he’s touting more producers or infrastructure players, or even a “pure play” LNG company, which would be Cheniere Energy (LNG) or Cheniere Partners (CQP), or the hopeful LNG developer Tellurian (TELL), since there aren’t really many other big operators in the US yet (though the California/Texas utility company Sempra (SRE) does also own part of the Hackberry, Louisiana LNG export project), and there are US companies with non-US LNG projects, like Chevron (CVX) in Australia and Angola or ExxonMobil (XOM) in Papua New Guinea and Qatar (ExxonMobil is also under construction with the Golden Pass LNG export facility in Texas, in partnership with the Qataris).

Gas is falling in price, so most of the gas companies are cheap — I’d be pretty conservative and stick with the more hedged operators (I own some EQT), and I do like the pipelines as a secondary play (I own some AMLP), but you can make your own call… the producers who hedge the least will have the most volatile earnings, which is good when things are booming and bad when producers are cutting production and hunkering down, as most of them seem to be doing so far this year. As we saw with Putin’s invasion almost exactly a year ago, the story can change quickly.

And Litman teases something else, too — not an energy-specific investment, but the “best way to profit from government growth”… here’s how he describes that:

“From this point forward, America will be the Saudi Arabia of natural gas.

“We will dominate this global market for a long time.

“One consequence of this trend is profits from this part of the U.S. economy will create taxes and power, allowing Biden and future presidents to expand the federal government’s reach like never before….

“… in addition to the LNG investments I’ve mentioned already, I strongly encourage you to immediately buy shares in a business I sometimes refer to as ‘U.S. Gov. Inc.”

So… who is this “U.S. Gov. Inc.”? We get a few other clues…

“It’s a publicly traded firm that might be the best retirement stock in America. It’s so intricately tied to the growth of the U.S. government that it’s almost like an arm of the government- but one that pays you instead of the other way around!

“In fact, our forensic accounting shows that 99% of this company’s revenues are in some way connected to the U.S. government.

“I believe this is the perfect retirement stock right now because there is ZERO doubt in my mind the U.S. government will be much bigger in the future.

“And there’s also very little doubt the company I call ‘U.S. Government Inc.’ will continue to see soaring revenue, record profits, and will continue making investors rich, year after year.”

There are a lot of government contractors out there, but we do get a few other hints:

“Over the past five years, it’s up 30% more than the S&P 500. Over the past decade, it’s up almost 500% more than the overall stock market, outperforming even high-tech companies like Facebook, Google, and Intel!

“And over the really long term… the past 30 years… it’s up more than 5,900% with dividends reinvested.

“That’s one thing I almost forgot to mention… it also pays huge dividends, which go up about 10% a year on average. So, you could collect fantastic cash distributions, while you watch the share price climb higher.”

The best bet there is probably Booz Allen Hamilton (BAH), which is one of the grandpappies of the government contractors and has shown just about that level of growth over the past five and ten years, and does indeed grow the dividend about 10% a year… but Booz Allen Hamilton only went public in 2010, so they don’t have a 30-year history to check against that 30-year 5,900% tease. They are 99%-reliant on government contracts, or have been recently — their specialty has been intelligence operations, but they’ve got a finger in pretty much every area of government consulting… and they’re one of the largest government contractors that isn’t also a massive weapons-system provider (like Lockheed Martin or Northrop Grumman).

The other big government contractor that has been around that long, and has exceptional long-term returns, is CACI International (CACI), which has returned more like 14,000% over 30 years (part of that is from starting at a low level — CACI was a tiny tech contractor for the government 30 years ago, with a market cap of only about $40 million, it has grown like crazy but is still “only” a $7 billion company)… but it can’t be our match, because they don’t pay a dividend at all right now.

Who else could it be? Leidos (LDOS) could be a decent match, the company does a lot of tech consulting for the government (in addition to work on hypersonic missiles, as is often teased by Dylan Jovine). They’ve been around for a long time, and effectively went public back in 2006 as what was then called SAIC (SAIC and LDOS have since separated — SAIC does more of the enterprise IT consulting for the government, LDOS seemingly does a little bit of everything), but no matter the name, they don’t have a 30-year record either… and their performance in recent years hasn’t been anywhere near as impressive as Booz Allen Hamilton.

Raytheon (RTX) is up there, too, and they have been around for 30+ years… but even if you go back 50 years, RTX hasn’t returned 5,900% with dividends reinvested (they’re at more like 1,500%).

The one big player that matches those specific clues is aerospace and defense contractor Northrop Grumman (NOC), with the one caveat being that nobody could really call the dividend “huge,” though I guess that’s a non-specific adjective and can be judged in the eye of the beholder (the current yield is 1.5%, and the dividend has been growing at roughly 10% a year)… so that’s the best we can do with the Thinkolator today. NOC should be the match for Litman’s tease… even if it’s a less profitable contractor than BAH, and has had lower long-term returns than CACI. It is, at least, much more directly linked to global increases in defense spending than either BAH or CACI, which I would agree seems to be a “sadly going to continue” trend.

Northrop is no nosebleed-growth darling, it’s a $70 billion giant, (I think only Lockheed Martin (LMT) is larger among the defense companies), but they still think they’ll be able to generate 20% free cash flow growth over the next three years (and will likely return all of that cash flow to investors as share buybacks and dividends).

If you’d like Litman’s take on how these kinds of aerospace and defense companies are much more profitable than it really appears in their GAAP accounting, he did post an interesting little teardown of the Invesco Aerospace and Defense ETF (PPA) last Fall. He’s actually mildly negative on NOC in that report, noting that it trades at an above-average valuation in his system, though the stock has fallen more than 10% since then so perhaps it’s more attractive now (using GAAP accounting, it looks fairly expensive — about 20X forward earnings, and the analyst estimates see them growing earnings from $25.50 last year to $27.52 in 2025, which is only about 2.5% annual growth… the defense budget and even GDP may well grow faster than that).

Personally, if I were to make large cap bet on the government continuing to get larger I’d probably stick with the much more diversified Booz Allen Hamilton (BAH) (or CACI or LDOS, even), since they’ve got a higher and probably steadier level of profitability, given the potential volatility of spending on major weapons and space programs, and that’s maybe a better thematic match for the idea of “U.S. Government, Inc.” … but Northrop Grumman has certainly been a standout winner over the past several decades. And both BAH and NOC, along with most of the other components of that PPA ETF, are likely to be long-term beneficiaries of rising global defense spending in an uncertain world.

And we’ll leave you there, dear friends. That’s what our cheerful little Thinkolator believes Litman’s touting and teasing, and how those ideas sit with me… when it comes to your money, of course, it’s your thinking that matters, and we’d be delighted if you shared those thoughts with us, maybe we can all make each other a little smarter along the way… just use the friendly little comment box below. Thanks for reading!

Disclosure: of the companies mentioned above, I own shares of EQT and Google parent Alphabet. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.