10 Powerful Growth Trends for Essential-Service Stocks in 2017  

The December 2015 issue of Conrad’s Utility Investor emphasized the importance of diversification to generating differentiated returns in 2016. In an aging bull market where fewer stocks lead the charge higher, selection becomes more critical. Along with our outlook for the eight major industries in our coverage universe, we highlighted a pick and a pan from each.

Despite a few laggards, these picks have outperformed, generating an average total return of 18.6 percent. Year to date, the Dow Jones Utility Average has gained 15 percent. Three of our eight pans are deep in the red, resulting in an average total return of less than 2 percent.

Among our picks and pans, only one pair didn’t exhibit a wide performance gap: Dominion Resources (NYSE: D) and Consolidated Edison (NYSE: ED)—a valuation-based pan—have moved in lockstep. In retrospect, we should have opted for FirstEnergy Corp (NYSE: FE) or another name that faces fundamental challenges.

In contrast, propane distributor AmeriGas Partners LP (NYSE: APU) topped our pan, Ferrellgas Partners LP (NYSE: FGP), by almost 100 percentage points.

Our calls in the midstream segment didn’t pan out, though we adjusted our views later in the year. Although we like Energy Transfer Partners LP’s (NYSE: ETP) diversification and its assets in the Permian Basin, the master limited partnership’s (MLP) excessive debt, high cost of equity capital and shrinking cash flow prompted us to cut the stock to a Sell. This about-face resulted in a 15 percent loss, but it also helped investors to avoid a 27 percent distribution cut.

We also reversed our negative outlook for Enable Midstream Partners LP (NYSE: ENBL), as surging throughput volumes in the emerging SCOOP play should offset weakness in other areas. For the long haul, we’d prefer to own Conservative Income Portfolio holding Buckeye Partners LP (NYSE: BPL).

Valuations didn’t matter much to investors in spring and summer 2016, though NextEra Energy (NYSE: NEE) and other large-capitalization names that benefited disproportionately from the rotation into the sector have also suffered disproportionately as money sloshes out of utility stocks. Expect valuations to matter more in 2017.

This year, we’ve opted to highlight 10 trends that should drive outperformance for investors who play them the right way.