with the Biggest Inflation-Busting Trends
From Roger S. Conrad
Dear Fellow Investor,
History never repeats itself exactly. But the more experience you have, the more you realize how much it rhymes.
Take inflation, which over the past two years has emerged as the single biggest challenge of our time for investors.
In the past year and a half, the US Federal Reserve has raised its benchmark Fed Funds interest rate by 5 percentage points. That’s the most aggressively they’ve acted to quell inflation since the 1980s.
For many investors, the impact has been dramatic if not devastating. And it’s still unfolding as I write this, including wholesale collapse of certain market sectors and rising risk of bank failures.
But the big surprise for most investors is still ahead. That is, nothing the Fed is doing now will restore inflation to the non-factor it was for the roughly 30 years prior to the pandemic. In fact, its actions to choke off investment have literally strengthened the forces of scarcity driving inflation.
Bottom line: Once the Fed declares victory and moves on, inflation will come roaring back, stronger than ever—just as it did when central bank governors ended its interest rate raising cycles of the late 1960s, early 1970s, late 1970s and mid-1980s.
Inflation is here to stay. And whether your investment goals are maximizing income, building real wealth or a combination of the two, the price of not acting now could scarcely be any higher.
I’ve been in the investment advice business for the better part of four decades. And I’ve found there’s more than one road to investing success. But the most reliable way to build real wealth and collect high income in the face of inflation’s corrosive power is simply this:
Assemble a balanced and diversified portfolio of stocks of top quality companies that pay dividends and consistently increase them.
Anyone who’s been paying for their own health insurance or a college education the past couple decades knows full well inflation didn’t just vanish after the 1970s. In fact, it’s forever been a fact of life, whatever official US government figures have claimed.
What’s changed in the past couple years or so is inflation has spread to pretty much every product and service Americans use in our daily lives. And worse, it’s become clear there are no easy policy solutions for rolling it back. And it’s more critical than ever that our investments keep up with it.
That could be a problem for the broad stock market. The S&P 500 Index now underlies trillions of dollars invested both actively and “passively”—through ETFs traded by computer algorithm with little or no actual human thinking.
It’s also literally swamped with high tech stocks that are as high priced relative to business value as they were prior to the Great Tech Wreck of 2000-02. In fact, at last count, traditional tech groups were 35 percent of the S&P 500 index! By comparison, big banks were less than 4 percent and energy wasn’t even in the top 10!
That’s pretty much the opposite of balance. And my graph of the S&P 500 over that decade shows what happened that time. Mainly, the index that is the very cornerstone of so many retirement and other investment accounts lost almost 25 percent of its value in the decade from January 1, 2000 through December 31, 2009. The Index was also underwater in inflation-adjusted terms in the decade of the 1970s—the last time we saw this magnitude of across the board price increases in the real economy.
Bonds did a lot better than the S&P in the decade of the ‘00s. But because most pay fixed rates of interest, they were huge losers to inflation in the 1970s. And yields on everything from high yield “junk bonds” to US Treasurys are even lower now than they were in the 1960s, on the eve of the last great inflation age.
Fortunately, there is an investment antidote to today’s inflation. That’s collecting stocks of top quality companies that aren’t expensive relative to the actual underlying value of their businesses. In fact, there’s rarely if ever been a better opportunity to buy the stocks I feature in my investment service: Conrad’s Utility Investor.
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That’s because my favorite companies are driving the major investment trends shaping 21st century America. They include the best bets on the historic transition to cleaner, more reliable and cheaper energy, the hydrogen economy, developing smart cities, near instantaneous communications and solving the world’s budding water crunch. And these opportunities are in turn driving our companies’ fastest business growth in history.
Best of all, my companies’ management teams have a century-plus history of sharing the wealth with stockholders—paying dividends several times the typical stock or bond ETF, and consistently increasing those dividends faster than even the current elevated rate of inflation.
These select companies’ story begins in the late 1800s. That’s when they first became the essential element of America’s relentless march to unmatched prosperity and global dominance.
120 plus years ago, you had to be among America’s elite to have access to electricity, personal communications, in-home heating and water/wastewater service. Now they’re available to everyone, as the shapers of emerging new industries and sustainers of the old. They’re in fact absolutely essential to a functioning society. And the companies that provide them run the world’s largest and most consistently profitable businesses.
Now the best of these companies are in the early innings of a second growth explosion—thanks in some cases to far-sighted management teams but increasingly to rapidly declining adoption costs for new technology, continuing ability to access capital while rivals falter, staunch regulatory and government support and an emerging wave of wholly new industries, made possible by ubiquitous and instantaneous global communications.
For many if not most companies, inflation is a huge and potentially insurmountable challenge to producing earnings and dividends investors can count on. In contrast, more than 90 percent of these essential services companies I track and recommend in Conrad’s Utility Investor have been able to stick to plans for long-term growth despite the highest inflation in decades.
And their accomplishment remains largely unappreciated and underestimated on Wall Street, and especially in the popular media. Dismissed as “mere utilities,” many still talk about them as if they were ossified relics of the first industrial revolution. Some even hold their generous dividends against them, referred to them as no more than alternatives to buying bonds.
They’re not. In fact, my investors know they’ve historically performed just as well during years of rising and falling inflation and interest rates. But the folly of the crowd means opportunity—for investors who take control of their wealth, and make the effort to find out the truth.
Ask yourself, when’s the last time you heard a friend, colleague or relative brag about buying a “hot” telecom, electric or water stock?
Chances are you haven’t, unless you know one of my readers personally. But I’ve been helping investors like you build wealth in these essential services companies for decades. And again aside from my readers, I could count the number of times I’ve heard such a boast on one hand—and with fingers to spare. But times are changing.
Did you know that the world’s largest producer of wind and solar power outside of China is a utility based in Juno Beach, Florida? The company has already made quite a bit of money for investors. But it’s growing faster now than it ever has while raising its dividend 10 percent every year. And the best is yet to come: This company just announced it will double the pace of installing solar in south Florida.
How about that a Virginia electric utility has just announced it will spend $72 billion to “decarbonize” by 2035—the most aggressive such effort in the world to date? By 2026, this company will be operating the largest offshore wind facility in North America. It also pays a dividend north of 5 percent.
The name “Tesla” is synonymous with anticipation of rapid global electric vehicle adoption. But did you know that the largest US operator of electric vehicle charging stations—the crucial infrastructure needed for EVs to be practical for most Americans—is actually a regulated distributor of electricity? The company also pays a dividend approaching 5 percent—following a 6 percent boost to start 2023.
Wind and solar energy are intermittent sources of electricity—what’s available always depends on how much the wind is blowing, and the sun is shining. That makes developing mass-produced low-cost, efficient energy storage the power industry’s Holy Grail. And here too, all of the leaders in the deployment race are electric companies.
That includes the owner and developer of the planet’s largest power storage facility, which is now operating in northern California. By the way, that company has promised to roughly double its dividend over the next five years, following a 15 percent plus boost this year. And later this year, this company will also be the second largest producer of nuclear power in the US—one of a half dozen utilities primed to take advantage of an already unfolding global nuclear renaissance.
The owner and operator of the world’s fastest and highest capacity communications network isn’t some Internet upstart. It’s a company that actually traces its roots back to Theodore Vail’s coast-to-coast telephone monopoly, established more than a century ago in a deal struck with trust-buster President Theodore Roosevelt.
Some of these innovators are at least starting to get their due from investors. As my graph shows, the world’s largest solar and wind producer NextEra Energy has already rewarded investors with some quite impressive returns. The period shown starts from when I first recommended this stock to Conrad’s Utility Investor readers.
As you can see, we got into this stock at a very good time. But our members who didn’t buy then have had several great opportunities to buy since. One of the best was actually earlier this year, ironically right after the company announced its highest earnings in history.
The best is yet to come for NextEra. But it’s far from the only dividend paying company poised to dominate the world’s accelerating transition to cleaner sources of energy. And every issue of Conrad’s Utility Investor brings you the best bargains
When we talk about the global energy transition, step one is moving off the dirtiest fuel, which is coal. Companies have already figured out they can simultaneously boost earnings and cut customer rates by swapping out old coal for new renewable energy and natural gas.
That’s what I call a virtuous cycle. And the further electricity providers travel on this road, the easier the going gets. Scaling up has always driven down costs and pushed up profits in this business. And the same is happening as the leading companies install more solar panels, wind turbines, energy storage and grid upgrades—while taking aging coal power plants permanently off line.
During their recent earnings call, NextEra Energy announced it will double its rate of solar energy deployment in south Florida over the next 10 years—bringing the sun’s share of its energy from 5 percent to 35 percent in 2032. That adds up to tens of billions of dollars in fuel cost savings it will pass onto customers, while it boosts system reliability against the state’s notorious hurricanes.
Bloomberg Intelligence reports companies moving to cleaner energy sources have also slashed their financing costs the past few years. That’s in part thanks to trillions of dollars controlled by “ESG” or environmental, social and governance funds willing to accept lower interest payments for lending to “green” projects.
Not one of the literally thousands of US regulated electric, gas and water utility mergers since the late 19th century has failed to create a stronger, more profitable company. And highlighting the best candidates for deals is also a staple of every issue of CUI.
Regulated companies have one other crushing advantage over everyone else when it comes to capitalizing on these megatrends: Absolute assurance once regulators approve their spending plans, they’re guaranteed to earn a return on investment that’s sometimes as high as 15 percent.
That means companies enjoy explosive growth potential as they invest big. But they’re also safe enough for even the most risk-averse investor to own. And while you wait on capital gains to build, you’re rewarded with generous and rising dividends.
I sure wouldn’t say the same about many of the companies that investors consider premier renewable energy investments now. That includes Tesla, which is still failing to build anything resembling scale in battery systems—especially with prices of critical metals elevated.
Of course, Tesla is a relative success story compared to most of the other “green” companies investors have chased in recent years. For example, the hydrogen economy is rapidly becoming closer to reality. Gas distributors and pipeline owners are mixing the universe’s lightest element with conventional gas to cut pollution and costs. And super oil majors are pairing up with renewable energy generators to produce “green” hydrogen from electrolysis.
But these advances haven’t helped prospects for once-hyped fuel cell companies. Once high flyers, Plug Power and FuelCell Energy have both lost almost 90 percent of their value since Joe Biden—easily the most supportive US president in history of renewable energy--entered the White House at the start of 2021.
More Americans than ever are installing solar panels on the roofs of their homes and places of business. But the largest US rooftop solar company—Sunrun—has yet to come close to turning a profit. And its shares are down 82 percent since Biden became president.
As for the developers of solar and wind turbines, these are manufacturers masquerading as technology companies. In reality, they’re locked in a race to the bottom, with survival depending on developing ever-cheaper and more efficient components. And their chief rivals globally are much larger, better-financed and government-backed Chinese firms.
The harder these developers push to drive down prices and increase efficiency, the more their profit margins are squeezed. But for adopters of wind and solar, their efforts are cutting costs, increasing adoption and boosting profits.
Many of the renewable energy adopters I recommend are regulated. That means every dollar they invest goes right into their rate base, and from there to their earnings and dividends. Others, however, sell the energy they generate under long-term contracts. Their returns are even higher and almost as secure.
One good example is Brookfield Renewable Energy Partners. Readers who followed me into this Conservative Holding have also done very well since our initial entry all the way in July 2013. Now after reporting the highest earnings in its history, it’s back on the bargain counter again.
Two other key strengths all of my recommendations feature: All pay generous and growing dividends. And each demonstrated the strength of its business model in pandemic-riddled 2020. And they’re doing so again now with inflation surging and even as supply chain issues disrupt other industries.
We publish the performance of every portfolio recommendation in every issue of Conrad’s Utility Investor so you can always see where we stand. And our Conservative Holdings, Top 10 DRIPs and Aggressive Holdings have consistently beaten the major benchmarks, including the Dow Jones Utility Average and the iShares Select Dividend ETF or “DVY”.
That includes 2022, a year when the S&P 500 lost -18 percent. The Dow Jones Utility Average outperformed with a 2 percent return. But the average of our three portfolios was 4.8 percent—adding to a 15 percent plus average gain in 2021 rather than giving it back in a year when most investors’ portfolios went into a hard reverse.
Readers who observed my occasional profit taking advice for high priced names did even better. So did those who took positions at the “Dream Buy” prices I highlight in every issue of Conrad’s Utility Investor.
But the real key to outperformance has simply been the high quality of our recommended companies’ underlying businesses. And with inflation still on the move and the Federal Reserve squeezing the economy toward recession, it’s already emerged as the critical difference maker in 2023.
I also advocate a simple, easy to follow four-part portfolio strategy, which I highlight in every issue of Conrad’s Utility Investor. Point one is to sell weakening businesses. Second is taking partial profits on temporarily overvalued and over-weighted stocks. Third is to use cash saved to buy high quality stocks when they hit preferred entry points--especially “Dream Buy” prices that always indicate special and unique buying opportunities. And point four is to take new positions incrementally rather than all at once.
Following this strategy enabled us to cash out a portion of our NextEra Energy at a near-term top in early January 2022. We were able to buy those shares back at a third off the selling price just a few weeks later.
I’ve had the confidence to make buy and sell calls like these—every one of them against the prevailing market sentiment—for several reasons. One, I’ve been following these companies now for the better part of four decades. I know how to tell when they’re healthy and undervalued—as well as when there are real signs of trouble that might knock a few points off their valuation. I’ve also developed a pretty good sense of when investor buying or selling momentum has carried their stocks too far in one direction or another.
But it’s also a fact that the trends I’ve highlighted here won’t just drive earnings for the next quarter or the next year. They’re for all practical purposes guarantors of growth for at least the next couple of decades.
Our task as investors is to target the best in class companies to bet on these trends, buy their stocks at the lowest possible prices, and wait for the capital gains to build, even as generous and rising dividends steadily roll in.
If history is any guide, some players will falter along the way, and as a result will no longer be good investments. Management will have simply over promised and under delivered.
An unlucky few will likely be hit with unprecedented natural disasters—including the ever-worsening pattern of hurricanes in the eastern US, tornados and floods in the middle of the country and firestorms in the west. Winter Storm Elliott exposed the weakness of aging power grids in many parts of the US. Texas’ freeze and power crisis in winter 2021 almost certainly won’t be that state’s last weather emergency. Nor will California’s scorching summer of last year.
It’s a safe bet some management teams will commit errors that run up the cost of certain projects. Offshore wind, for example, is already seeing severe cost inflation that’s encouraging consolidation of ownership with the largest and best capitalized companies. Then there’s the culture war that’s now spread to a debate over energy policy, with utilities in some states in danger of getting caught in the middle and unscrupulous politicians bashing companies to win votes. And with inflation on the rise again, ability to control for raw materials, labor and debt is an increasing challenge.
Rest assured, when this happens to a company we own, we’ll switch to stronger players. And that’s where a resource like Conrad’s Utility Investor is even more valuable than simply helping you to pick out the best buys.
Here’s a bit more on my “Quality plus Value” approach:
Our 5-factor Quality Grade system identifies the best in class from the nearly 200 companies in our Utility Report Card coverage universe. We buy them at the best possible prices, using our formula comparing valuations with projected returns.
We then ride our favorites’ reliable earnings growth to higher income and powerful capital gains. And we’ll occasionally sell part or all when prices reach truly stratospheric levels, or if businesses underperform.
I admit not all of the recommendations I’ve made in three decades plus doing this have worked out. But I’ve also learned the hard lesson to never just hold and hope, not for myself and especially not for CUI members.
When I see a company’s underlying business is softening, it goes on my Endangered Dividends List. And unless there’s a very good reason to stick around, I’m out, even if that means taking a loss to avoid the risk of a much larger one later on.
My standard is to treat CUI members’ money as if it were my own, or better still my now 96-year-old mother’s. That’s how I’ve done business throughout my career, the last 10 as editor and publisher of Conrad’s Utility Investor. And it’s how I intend to keep operating, Lord willing, for the next 36 years, when I’ll be about the same age my gardening enthusiast mom is now.
Chances are you’ve heard of some of the stocks I’ve tracked since the mid-1980s, and not of others. But I can say with assurance you haven’t missed out on the massive opportunity I see ahead for our recommendations. In fact, for the best-positioned companies, gains will be at least as explosive as anything in the previous bull market.
Sound like something you’d like to get in on? Then please choose your plan below and join Conrad’s Utility Investor now. And if you’re not satisfied?—No problem.
Cancel any time in your first 30 days and get your full membership fee back. That’s the risk free guarantee I’m making as publisher of Conrad’s Utility Investor, and as an advisor whose word has been his bond for more than 36 years in this business.
Thank you very much for reading.
Here’s to your health and wealth!
Roger S. Conrad
Editor and Publisher
Conrad’s Utility Investor
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