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Executive Summary

A Taxing Situation

By Roger S. Conrad on Dec. 10, 2017

Wall Street’s eyes are fixed on Pennsylvania Avenue in Washington, DC, where Congress continues to debate major changes to the US tax code.

If and when tax reform passes, we’ll post an Alert outlining its implications for our essential-service stocks. At this juncture, we expect more positives than negatives for the names in our Utility Report Card.

In cases where the news isn’t so good, investors should remember the aftermath of Canada’s “Halloween Massacre” of 2006, when the government changed the tax treatment of income trusts, eradicating some CA$24 billion in market value in a matter of days.

Albeit compelling, this horror story had a happy ending for some investors: the massive returns posted by best-in-class income trusts over the subsequent years. Pembina Pipeline Corp (TSX: PPL, NYSE: PBA), for example, has returned more than 450 percent since those dark days, outperforming the S&P 500 by more than 3 times.

This calamity resulted in plenty of pain—and a once-in-a-generation buying opportunity.

Although US tax reform may not result in as much destruction, many utility stocks trade at historically elevated valuations, creating an environment where market participants are more likely to sell first and ask questions later.

Sharp selloffs in AT&T (NYSE: T) and Dominion Energy (NYSE: D) after earnings hiccups earlier this year created buying opportunities for nimble investors. We remain laser-focused on taking advantage of similar situations in coming months and quarters.

Our strategy at Conrad’s Utility Investor continues to focus on buying and holding the highest-quality dividend payers at the best prices.

Achieving this goal requires keeping an open mind and poring over quarterly results, earnings call transcripts and trade publications to identify long-term winners and steer clear of the losers. We also attend several industry conferences each year and are always on the lookout for new ways to give our readers an edge.

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