Roger S. Conrad

Diversification and focus on quality don’t prevent every loss. But they’re the best assurance a small setback won’t become a large one, as well as the surest road to ultimate recovery. That’s food for thought as you peruse last year’s performance of Conrad’s Utility Investor coverage universe stocks. While in 2017 the vast majority produced solid returns, most didn’t in 2018. The list of winners included takeover targets, trouble-free regulated utilities and some foreign energy stocks. The far longer roster of losers included companies that were already in trouble as well as high quality utilities that simply ran out of gas.

With barely a week left to go, the fourth quarter is on track to be nearly as bad for high yield bonds as it has for high yield stocks.  

The combination of worries about the global economy in 2019 and political chaos have so far made this the worst December for the stock market in memory.

This week, Dominion Energy (NYSE: D) is set to reap the reward for its bold takeover of Scana Corp (NYSE:SCG) as the South Carolina Public Service Commission has approved the merger.

So far in fourth quarter 2018, the Dow Jones Utility Average has returned 5.4 percent. That’s against a -9.3 percent loss by the S&P 500. Utilities are also now well ahead for the full year, after lagging behind for most of it. I’m not surprised money is flowing into essential service companies, given the level of investor fear of a potential recession, bear market and US/China trade war. And utilities’ strong third quarter results, which I again highlight in the Utility Report Card, confirm their businesses will hold up again if the worst does happen. On the other hand, this is a world where stock market ownership has been increasingly concentrated into fewer hands. In this case, it’s giant exchange traded funds that are managed by passive strategies, governed by what appear to be remarkably similar algorithms. That means a lot of money moves in a hurry, and not always for good reason. Favorite stocks like NextEra Energy (NYSE: NEE), for example, have been driven relentlessly higher to nosebleed valuations. Meanwhile, “risk off” moves have tanked most high yielders, most recently Amerigas Partners (NYSE: APU).

In little more than a decade, shale-drilling technology has converted the US to a net exporter of energy. And frac water recycling, more efficient proppants and use of information technology continue to drive down costs, increasing industry staying power.

It’s been an up and down 2018 so far for Conservative Holding Dominion Energy (NYSE: D). Downside began shortly after New Year’s, following a daring takeover bid for SCANA Corp (NYSE: SCG). That was just as South Carolina regulators and legislators were turning utilities into election year punching bags for cancelling the Summer nuclear construction project.