Roger S. Conrad

Takeovers, tax reform and President Trump dominated the financial headlines in 2017—and all signs point to this trend continuing well into the new year. When it comes to investment returns, however, quality remains the most important theme. And with valuations still near records, the bull market a year older, and volatility picking up in the utility sector, owning best-in-class names will be more critical than ever to delivering differentiated returns in 2018. This month’s feature article highlights key trends, as well as our picks and pans, for nine categories of essential-service companies. We also revisit our best ideas from the start of 2017; these picks delivered an average total return of 19.6 percent, walloping the 5.8 percent gain posted by our pans. Utility stocks often underperform in January, as portfolio managers allocate more capital to aggressive names. This year, the Dow Jones Utility Average’s performance has taken a hit from concerns that California utilities could face billions of dollars in liabilities related to the catastrophic wildfires that ravaged the state. Although weakness in utility stocks has taken some of our Portfolio holdings down a bit, our position in ProShares UltraShort Utilities (NYSE: SDP) has gained about 15 percent since mid-November. Meanwhile, the pullback in utility stocks has brought a few of our Portfolio holdings below our value-based buy targets. Our commitment to diversification has also paid off, with several of our holdings rallying in the new year despite weakness in utility stocks. Conservative Income Portfolio holding Pembina Pipeline Corp (TSX: PPL, NYSE: PBA), for example, hit a new high last week, benefiting from the rotation into the energy sector. That’s why we stick with stocks that lag in a given year—as long as they’re backed by high-quality businesses. Readers should check out this month’s update to the Utility Report Card, which features our take on how US tax reform will affect the each of the roughly 200 companies in our coverage universe. We also revisit the factors behind our proprietary Quality Grades.  

This high-quality utility stock is on sale after announcing an opportunistic acquisition.

Regulated gas, electric and water utilities won’t benefit directly from the Tax Cut and Jobs Act’s signature change: a reduction in the top corporate tax rate to 21 percent from 35 percent. But tax reform still creates a number of opportnities for regulated utilities, especially the strongest operators.

Roger Conrad will host an exclusive Live Chat for Conrad's Utility Investor subscribers on Jan. 9, 2018, at 2 p.m. ET.

One thing we can say with certainty: Investors’ tax losses will be worth less in 2018 than in 2017, especially for those in the highest tax brackets.

With 2017 winding down, investors’ focus naturally shifts to portfolio maintenance and positioning for the new year. We review our big winners for potential profit-taking and our few laggards for tax-loss selling.

What’s worse for a company’s shareholders than a dividend cut? Well, two names on our Endangered Dividends List face the very real threat of insolvency.

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.

Investors win when companies do the right thing on disclosures.

Holiday shopping for stocks? This Canadian powerhouse offers a unique value proposition for conservative investors in search of a safe yield with substantial upside.