Your Best Bets for the Biggest Trends
From Roger S. Conrad
Dear Fellow Investor,
There’s more than one road to investing success. But in my 35 years in the advice business, I’ve found this one is the surest, safest and most rewarding: That’s buying and holding best in class companies that have hitched themselves to inexorable, irresistible long-term trends.
And rarely if ever has there been a better opportunity to do just that —by buying the high quality utilities and essential services stocks that are driving America’s historic transition to cleaner and cheaper energy resources, smart cities and near instantaneous communications.
120 years ago, electricity, personal communications, in-home heating and water/wastewater service were only available to the very wealthiest. Since then, they’ve become available to all. And the utilities making that possible are now among the world’s largest and most consistently profitable companies.
Now these same utilities are on the doorstep of a second growth explosion, thanks to rapidly declining adoption costs for new technology, access to cheap capital and an unprecedented consensus to tackle environmental imperatives.
Utilities’ potential remains largely unappreciated and underestimated on Wall Street, and especially in the popular media. Companies still haven’t been able to shake their stodgy reputation as ossified relics of the first industrial revolution. And because they pay generous dividends, many investors treat them as though they’re merely alternatives to buying bonds.
Ask yourself, when’s the last time you heard a friend, colleague or relative brag about buying a “hot” utility stock?
I’ve been helping investors build wealth in these essential services stocks for decades. And up until recently, I could count the number of times 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? That the headquarters for the second biggest is in Atlanta, Georgia?
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? And $26 billion of that will happen by 2026, including construction of the largest offshore wind facility in North America.
The name “Tesla” is now synonymous with anticipation of rapid global electric vehicle adoption. But did you know utilities are far and away the leading developers of the charging stations needed to run them?
The more intermittent wind and solar we use, the more we need affordable, efficient and abundant energy storage. And here too, the companies that count are utilities. That includes both the leading developer of systems and the operator of the planet’s largest power storage facility, which earlier this year entered service in California.
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 monopoly AT&T, established more than a century ago in a deal struck with trust-buster President Theodore Roosevelt.
Some of these utility innovators are at least starting to get their due from investors. As my graph shows, 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 also had some great opportunities to buy. One of the best was early last year, when the stock market crash briefly took NextEra down to my “Dream Buy” price.
I’m confident we’ll have other great opportunities to buy this exceptional company down the road. But it’s far from the only electric utilities poised to dominate the world’s accelerating transition to cleaner sources of energy. Nor is it the sector’s most compelling buy right now. In fact, I’m advising CUI members be a little patient with this one, and focus their fresh money on stocks Wall Street hasn’t yet fully discovered.
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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 utilities travel on this road, the easier the going gets. Scaling up has always driven down costs and pushed up profits in this business. And it’s doing so again as companies install more solar panels, wind turbines, energy storage and grid upgrades—while taking aging coal power plants permanently off line.
As Bloomberg Intelligence reports, moving to cleaner energy sources has also enabled companies to save millions in financing costs. In fact, trillions of dollars controlled by “ESG” or environmental, social and governance funds are pouring into utility stocks, and their low interest rate “green” bonds as never before.
NextEra is certainly getting its share of that money. The stock’s current earnings multiple of around 30 times is at a level that was once unheard of for an electric utility. It frankly makes me very cautious. But commanding such a premium price makes the stock a low cost currency for funding any investment the company wants, from building massive new ultra-efficient solar farms to acquiring whole companies.
And NextEra’s well-known appetite for acquisitions also makes potential takeover targets like Duke Energy more valuable. Not one of the literally thousands of US utility mergers since the late 19th century has failed to create a stronger, more profitable company. And highlighting the best candidates for deals is a staple of CUI.
Utilities have another advantage other companies simply don’t when it comes to capitalizing on the energy transition. That’s the 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.
Duke, for example, pans to spend $59 billion through 2024 on its transition to renewable energy, chiefly solar in the Carolinas and Florida. It will dish out another $65 to $75 billion in the five years after that. And because that money already has the stamp of approval in those states, it means earnings and dividends will grow at least 7 percent a year.
Like NextEra and its affiliate NextEra Energy Partners, Duke’s also a member of my Conservative Holdings. These companies all boast explosive growth potential as they invest big to capitalize on these mega-trends. 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 most of the companies that investors consider premier renewable energy investments now. That includes Tesla, which made a lot more money trading energy credits and bitcoin last year than actually selling cars.
Five years ago, Tesla’s former affiliate SolarCity boasted its rooftop offerings would push utilities into a death spiral. Instead, it still hasn’t managed to develop a sustainable business model, despite being absorbed into Tesla.
There’s potential for the largest US rooftop solar company—Sunrun—to get there. But that will depend on the company evolving into an effective energy aggregator in California. And the biggest beneficiaries if it succeeds will be its utility partners, like Southern California Edison.
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 utility adopters of wind and solar, their efforts are cutting costs, increasing adoption and boosting profits.
Not all of the renewable energy growth stocks I recommend are actually regulated utilities. But all of them do have that same surety of returns as adopters, like Brookfield Renewable Energy Partners, which relies instead on a long-term contract business model.
Readers who followed me into this Conservative Holding have also done very well since our initial entry all the way in July 2013—though as you can see from my price graph, most of those big gains only came in the last couple years. We had to be patient for our windfall.
At this point, Brookfield also looks a bit rich for fresh money to buy. That could change at the drop of a hat, as we saw in early 2020 when the market crashed. But for now, I’m recommending a half dozen other companies for CUI readers that are using this same successfully proven model. And unlike Brookfield, they’re largely yet to be discovered, so the lion’s share of the upside is yet ahead.
These “next Brookfields” are also prime candidates for short-term windfalls from takeover offers. So are several dozen of the small to mid-sized electric utilities I track in my comprehensive Utility Report Card.
Two other key strengths my renewable energy recommendations have in common: All of them pay generous and growing dividends, and each demonstrated the strength of its business model in pandemic-riddled 2020.
As an investor, I don’t have to tell you last year was a wild ride for the stock market. For some stocks, recovery was definitely “V” shaped from the losses of February and March.
But for other stocks, the shape has better resembled an “L,” with gains coming only very slowly and with much ground yet to be made up. And still other stocks—those most affected by the pandemic and its fallout—have looked like a “K,” continuing to head down and in some cases out.
It seems likely that by late 2021, the pandemic will have lost its deadly grip on human health and the economy. But just as investing well in 2020 required being nimble, so will it in 2021, which is now year 13 of the historic bull market that began in March 2009. And that’s true even if your basic investment inclination is like mine: To buy and hold best in class companies to collect rising streams of dividends over time.
That’s the point of my three-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.
Following my three-part strategy enabled us to cash out a portion of our NextEra Energy at a top in mid-February 2020. We were able to buy those shares back at a third off the selling price just a few weeks later. By January 2021, we were again at a great profit taking point, which my readers were able to take advantage of.
Now NextEra shares are again approaching a good entry point. And the same is true for a Baker’s dozen high quality essential services companies I’ve identified.
I’ve had the confidence to make these buy and sell calls—every one of which was against the prevailing market sentiment—for several reasons. One, I’ve been following these companies now for more than three decades. I know how to tell when they’re healthy and when there are real signs of trouble. 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 renewable energy adoption isn’t just a driver of utility earnings for the next quarter or the next year. It’s for all practical purposes a guarantor of growth for the next couple of decades.
All the winners really have to do to is make a plan to replace their coal with wind, solar, storage and gas. They then need to win approval from regulators, which is easier than ever because of the public’s appetite for cleaner electricity and lower rates. And finally, management must execute plans in an extremely favorable environment, where costs of deployment are falling rapidly, and access to low cost capital is basically unprecedented.
All we investors have to do is seek out the best in class companies to bet on this trend, 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, subjecting shareholders to the penalty of disappointing inflated expectations.
An unlucky few may 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. Texas’ freeze and power crisis in winter 2021 is already claiming victims, as did California’s scorching summer of 2020.
Management may commit errors that run up the cost of certain projects. Or the regulatory climate could shift for the worse, with unscrupulous politicians becoming utility bashers to win votes. Inflation may return to drive up the cost of certain raw materials, as well as borrowing costs for some.
When this happens, we’ll want to switch horses before losses become too great to recoup. And that’s where a resource like Conrad’s Utility Investor can be just as valuable as it is helping to pick out the best buys.
For the past three decades plus, I’ve followed what I call a “Quality plus Value” approach. Here’s how it works:
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 93-year-old mother’s. That’s how I’ve done business throughout my career, the last seven plus as editor and publisher of Conrad’s Utility Investor. And it’s how I intend to keep operating, Lord willing, for the next 35 years, when I’ll be about the same age my gardening enthusiast mom is now.
You may not have fully invested in stocks that enjoyed a “V” shaped recovery this year. And you might own more than a few with price charts better resembling and “L” or even a “K.”
But I can say with assurance you haven’t missed out on the much bigger opportunity ahead—as some of the strongest companies in America execute their multi-decade transition from the energy of the past to the energy of the future. And for the best in class utilities and other essential services companies I recommend, the upside is at least as explosive as their gains during the last bull market.
Sound like something you’d like to get in on? Then please check out Conrad’s Utility Investor, with a trial subscription for $100 off the regular price of $499.
By joining us now with a $399 membership, you’ll never pay more than that price, provided your subscription stays up to date. It’s what I call our forever guarantee.
And if you’re not satisfied?—No problem. Cancel any time in your first 60 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 35 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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