For the most part, 2020 was a year when winning stocks kept moving higher. Underperformers remained stuck in neutral or worse.
Renewable energy companies’ abrupt conversion from value to momentum stocks was by far the most positive story in the Conrad’s Utility Investor coverage universe in 2020. Nine of the top ten performers owned their gains to a sharp uptick in investor enthusiasm for wind, solar, battery storage and electric vehicles.
Conversely, many other essential services companies I track are still one-third or more off their highs of last February. And the result was the largest performance gap in the history of this advisory, some 843 percentage points between the biggest winner and loser.
“Big Mo” is back in style for stocks. The result is investors continue to crowd into this year’s biggest winners while shunning underperformers, even as big blue chip averages like the S&P 500 and NASDAQ 100 set one new high after another.
In our coverage universe, momentum has been very strong since last month’s election for anything to do with renewable energy. And the result is several favorites are now ripe for taking partial profits, despite strongly bullish long-term outlooks.
Economics not politics are what ultimately drive investor returns. And as this month’s Utility Report Card comments show, Q3 results and guidance are quite strong for the vast majority of the nearly 200 essential services companies we track.
The utilities sector also continues to get a lift from M&A. Since the October feature article went to post, two all-cash deals have been announced. One of them involves Conservative focus stock Avangrid Inc (NYSE: AGR). The other is the nearly 60 percent premium offer for one of last month’s picks Alaska Communications (NSDQ: ALSK).
A “rumored” merger offer from NextEra Energy (NYSE: NEE) did more than ignite a rally in Duke Energy (NYSE: DUK) shares this month. It appears to have breathed new life into the whole utility sector, which with few exceptions has consistently lagged the S&P 500 this year.
A comeback has been overdue for some time. US utilities demonstrated their business resilience in troubled 2020. And they’re poised to accelerate growth by cashing in as the world transitions to suddenly cheap renewable energy and adopts ultra-fast 5-G communications.
Want to invest in transforming developments like renewable energy, 5-G, smart cities and electric vehicle adoption?
You could roll the dice and bet Tesla Inc (NSDQ: TSLA) adds to gains that once approached 500 percent year-to-date. Or you could jump on the companies in the feature article, for compelling yields and far more reliable growth.
More than two-thirds of new power generation capacity installed worldwide this year was wind and solar. And in the US, most was either long-term contracted or entered utilities’ regulated rate base. In fact, all of the world’s leading developers of renewable energy now are utilities, led by America’s top wind and solar producer NextEra Energy (NYSE: NEE).
Roughly 10 percent of Utility Report Card companies have yet to report Q2 results and update guidance. That’s more than enough of a sample to draw one very powerful conclusion:
In the worst economy in 90 years, the utilities and essential services business model has proven its resilience.
Last quarter, US GDP contracted 9.5 percent and most of the world did much worse. But most coverage universe companies posted stable earnings that supported dividends and strong balance sheets. And they kept long-term growth strategies on track.
Just how much damage is Covid-19 fallout doing to corporate earnings, dividends and balance sheets? We’ll get our best indication yet over the next month or so, as the vast majority of coverage universe companies report calendar Q2 results and update guidance.
The good news is regulated utilities appear to be tracking the expectations management communicated during Q1 earnings calls. Conservative Holding Sempra Energy (NYSE: SRE) in late June actually raised the mid-point of its 2020 earnings guidance from $7.10 to $7.50 per share.
In first half 2020, COVID-19 fallout triggered the sharpest global economic and stock market plunge on record. Now relaxing of pandemic control measures has raised hopes for an equally dramatic recovery the rest of the year.
China was first hit by the virus and first to take control of its spread. And while certainly not back at 100 percent, its economic rebound is picking up speed.
That’s not only good news for Aggressive Holdings China Mobile (HK: 941, NYSE: CHL) and CLP Holdings (HK: 2, OTC: CLPHY). It also bodes well for durability of green shoots we’re seeing in America, including signs of steadying power demand reported by Utility Report Card electric utilities.
About nine of every ten Utility Report Card coverage universe companies have now reported Q1 earnings and updated guidance. Takeaway number one: Even among essential services providers, COVID-19 fallout varies greatly.
Every earnings season my first priority for analysis is the Portfolio. Despite the unprecedented uncertainty, I’m happy to report the vast majority of recommended companies were able to issue meaningful guidance. And not only that, the updated forecasts are by and large in line with their expectations three months ago.
That’s truly extraordinary, considering the global economy has suffered its most dramatic setback since the Great Depression of the 1930s. There’s no guarantee even the best in class of essential services won’t ultimately succumb, if the big picture gets cloudy enough.
Over the past two weeks, the Dow Jones Utility Average has recouped nearly two-thirds of its initial bear market plunge. That’s the sector’s most dramatic two-week rally in history, following its most brutal one-month selloff.
Along the way, we’ve been able to buy every Portfolio stock below its maximum entry point. And 30 have traded under “Dream Buy” prices, levels only reached under extreme conditions like those we’re living through now.
The question now is will utilities’ current “V” shape recovery continue? Or will stocks follow the pattern of every previous market and at least retest the lows?
On the positive side, the spread of COVID-19 appears to have eased up in some hard-hit areas, particularly China. That’s raised hopes the world can go back to work in the relatively near term.
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Roger's current take and vital statistics on more than 200 essential-services stocks.