Roger S. Conrad

We add three bonds to our basket of fixed-income securities.

While the market fixates on whether the Federal Reserve will hike rates, too many income-seeking investors ignore the danger lurking in their portfolios.

It's been an active year for mergers and acquisitions in the utility sector. We discuss our key takeaways from a major deal that closed ahead of schedule and highlight some of the main themes that will be in play going forward.

We delve into some the recent trends in mergers and acquisitions involving master limited partnerships and other midstream operators.

Utility stocks’ summer swoon picked up steam, with the Dow Jones Utilities Average down more than 9 percent from its high in early July. The financial infotainment industry has blamed this pullback on speculation that the Federal Reserve could raise interest rates this fall. In reality, the run-up in utility stocks to record valuations set the stage for momentum-seeking investors to use any excuse as an opportunity to take profits. Expect to hear a lot more about US monetary policy and its implications for utility stocks if this correction deepens in coming weeks. But bear in mind that weakness in the US economy likely will prevent the Federal Reserve from further tightening this year and that market history reveals scant correlation between utility stocks and the direction of interest rates. Consider that when the Federal Reserve hiked the benchmark interest rate by 425 basis points between June 2004 and June 2006, the Dow Jones Utilities Average generated a total return of more than 60 percent—almost four times the gain posted by the S&P 500. Concerns about rising interest rates may give investors an excuse to sell utility stocks in the near term, but frothy valuations not seen since the 1960s will be the real cause. At these levels, momentum-seeking investors tend to have itchy trigger fingers. Against this backdrop, we continue to err on the side of conservatism and bide our time for utility and telecom valuations to revert to the mean, at which point will look to deploy the dry powder we’ve accumulated by exiting riskier positions and taking partial profits on big winners.

The recent selloff in utility stocks has been a boon for our hedge position, but the sector still trades at historically elevated valuations. Investors should stick with our three-part game plan for navigating this challenging market.

A strong US dollar has weighed on the returns generated by international utility stocks in recent years. But investors should consider looking abroad for high-quality utility and telecom names that trade at reasonable valuations and offer a favorable risk-reward proposition.

Soft commodity prices, declining oil and gas production in some regions, counterparty risk and elevated costs of capital have threatened midstream master limited partnerships’ distributions over the past two years.

An undemanding valuation and solid growth prospects make this European utility a good buy for aggressive investors.

This Canadian telecom giant continues to generate ample free cash flow while paying a generous dividend and outspending its rivals on investments in network quality.