Since the beginning of May, 80 percent of the companies in our model Portfolios have hit 52-week highs. And the rest are a good day’s trading from this achievement. Our Aggressive Income Portfolio has delivered an average return of 27.5 percent since its inception, roughly doubling the 13.7 percent gain posted by the Dow Jones Utilities Average over equivalent holding periods. Meanwhile, the picks in our Conservative Income Portfolio have generated an average return of 13.4 percent, slightly lagging the benchmark index’s 14 percent gain.
But new risks have emerged that bear monitoring. A growing focus on allowance for funds used during construction (AFDUC) has identified some utilities that may be at risk of potential write-downs. Meanwhile, others find themselves in the crosshairs of the Obama administration’s aggressive environmental policies.
The greatest danger to most of the 207 stocks in my Utility Report Card comes when investors’ expectations rise along with prices. That’s why it’s critical to stick with my buy targets, which are based on long-run value—not near-term momentum.
Be patient when a stock you want to buy moves above my buy target. I will raise those targets when potential returns rise and risks diminish. Until then, focus your firepower on the stocks highlighted in this issue.
There’s nothing like a convincing rally to silence bears. And utilities are still the best- performing sector this year, with the S&P 500 Utilities Index beating the S&P 500 by better than a 2-to-1 margin.
Our three Conrad’s Utility Investor Portfolios—Aggressive Income, Conservative Income and Top 10 DRIPs--have fared well, adding to solid 2013 gains. The biggest winners have been companies that analysts shunned earlier in the year; for example, formerly out of favor Exelon Corp (NYSE: EXC) has returned almost 40 percent.
Outperformance, however, should never be taken for granted. Even in sectors as stable as essential services, the high and mighty frequently change places with the outcasts.
This year is shaping up as a big one for utility mergers. The market value of companies in our Utility Report Card that have announced deals has already reached $237 billion. And Berkshire Hathaway (NYSE: BRK.A, BRK.B) has yet to pull the trigger. (See Buffett Still Eyeing Utilities.)
Thus far, a handful of giants account for virtually all the volume. That includes Aggressive Income Portfolio holding Exelon Corp’s (NYSE: EXC) all-cash bid for Pepco Holdings (NYSE: POM).
The new company immediately gains major synergies in the Mid-Atlantic region, providing financial support for its nuclear power plants in wholesale markets.
I never speculate on takeover stocks that can’t make it on their own--a bias that held me out of Pepco this year. But in the long run, Exelon shareholders will benefit the most from this deal, thanks to a low purchase price and numerous opportunities to upgrade underperforming regulated assets.
As for finding strong companies with takeover appeal, the key is business performance.
Roger's favorite utilities for investors seeking superior price appreciation by taking calculated risks.
Harness the tried and true wealth-building power of rising dividends.
Nothing compounds wealth like reinvesting a rising stream of dividends.
Warning: Falling Dividends.
Roger's current take and vital statistics on more than 200 essential-services stocks.