Roger S. Conrad

All Conrad’s Utility Investor Portfolio companies have now reported calendar second quarter results and updated their guidance, and all but TerraForm Power (NSDQ: TERP) are highlighted in the August issue Utility Report Card.  

When I started in this business, individual investors dominated daily trading. Now, even decisions by professional stock pickers are eclipsed by passively run pools of capital, governed by algorithms executed by artificial intelligence. The consensus seems to be this is simply the next phase of evolution. After all, computers trade at multiples the speed of ordinary humans and without the emotion that’s often the biggest failing of investors. The problem is capital governed by algorithm faces the same conundrum as do large funds run by managers: The larger the pool, the smaller the list of stocks available to trade without moving the market, no matter how sophisticated the programming. And that’s leaving aside the fact that many algorithms are written with similar objectives--i.e. to beat the S&P 500 and other benchmarks—and are therefore likely to take similar actions at the same time. We’ve yet to see passive investing strategies tested in a crisis. But we already know that over any meaningful period of years, pools of capital using passive strategies such as the Vanguard Target Retirement funds have dramatically underperformed market averages. We also know that price momentum created by passive strategies creates opportunities to buy lower and sell higher than in previous market cycles. Taking advantage does require knowing whether a fallen company is still strong on the inside, or if a high flyer has exceeded any reasonable gauge of value and is likely to take a tumble. But by following a disciplined strategy of seeking quality and waiting for the right price, we’re going to find many more opportunities like March Focus stock AES Corp (NYSE: AES), which has since returned upwards of 30 percent.

Back in February, Hannon Armstrong Sustainable Infrastructure (NYSE: HASI) announced it wouldn’t raise its dividend this year. We didn’t like the freeze but agreed with management’s desire to instead build coverage and fund growth, while absorbing the expense of converting then-hefty variable rate debt to fixed rates.

Conservative Holding Brookfield Renewable Partners L.P. (TSX: BEP-U, NYSE: BEP) is lower by about 11 percent in US dollar terms this year. That’s 11 percentage points worse than the Dow Jones Utility Average and 18 points behind the S&P 500. But Brookfield’s stumbling share price is a stark contrast to an underlying business that’s stronger than ever, underscored by a 6 percent plus dividend still on track for 5 to 8 percent long-term annual growth.

Whether your primary investment objective is income, safety, capital growth or short-term gains, earnings reporting season is where the rubber meets the road. For traders, market reaction is what’s most important. For investors in our three Conrad’s Utility Investor model portfolios, it’s the actual numbers and guidance that determine whether companies are still on the right track, and therefore if we want to stick with them.

Enbridge Inc (TSX: ENB, NYSE: ENB) management isn’t budging from take under offers for its US MLP affiliates Enbridge Energy Partners (NYSE: EEP) and Spectra Energy Partners (NYSE: SEP). That boosts the odds the proposed stock-for-stock exchange ratio will hold, along with distribution cuts of 40 percent for Enbridge and 10 percent for Spectra.

Giant accounting firm Ernst & Young LLP projects more than 60 percent of Americans will outlive their investment portfolios. Some will over spend. But the greatest threat to all is simply poor investment returns: The result of lacking a disciplined income strategy and relying on investments that sacrifice too much potential return for a dubious promise of safety. I definitely count cash alternatives and the vast majority of bonds in that category. As our table “High Yields With Upside” highlights, we’ve done very well buying undervalued fixed income from our Utility Report Card universe of essential services companies.

Canada’s Superior Plus Corp (TSX: SPB, OTC: SUUIF) generated few headlines last month, when it paid $900 million for NGL Energy Partners’ (NYSE: NGL) propane distribution business. However, this merger is highly remarkable for three major reasons.

The big question facing investment markets in second half 2018: Will the US economy keeping growing at a 4 percent plus rate?