Issues

What a difference a few months makes in a momentum driven stock market! Earlier this year, it was our renewable energy stocks benefitting from frenzied buying of anything investors deemed to be “green,” with prices reaching generous profit-taking levels.

Now it’s our oil and gas pipeline stocks that investors can’t get enough of. And in contrast, Conservative Focus stock Brookfield Renewable Partners (NYSE: BEP) and Aggressive Focus stock Atlantica Yield (NSDQ: AY) are trading at positively attractive valuations. Even best in class wind and solar company NextEra Energy (NYSE: NEE) is in buying territory.

$274 billion: That’s the staggering sum President Biden’s infrastructure plan would allocate to US utilities, as investment in new transmission lines, renewable energy deployment and electrification of transportation. Bloomberg Intelligence estimates that’s enough to add at least 2 percentage points to utility earnings growth rates. Getting that into rate base would require the assent of Congress as well as state regulators. But even $100 billion of fresh tax incentives and other subsidy would provide a huge lift for earnings and dividends, and ultimately share prices.

For the 17^th year since 1984, the Dow Jones Utility Average ended the month of January in the red (-1.4 percent). And utilities have dropped further, with the DJUA down slightly less than 5 percent for the first 9 weeks or so of 2021.

The good news: 10 of those years, utilities ended higher. And only in 2008, 2002, 2001 and 1994 were they meaningfully lower.

Most Utility Report Card companies report their Q4 earnings and update guidance later this month. But what I’ve already seen so far provides plenty of reason to be confident in best in class essential service businesses this year.

That definitely includes the 17 recommendations for which we now have numbers. As I highlight in the Portfolio discussion this month, more than a few of them have also proven to be reliable bellwethers for their respective sectors. And both Conservative Focus stock BCE Inc (TSX: BCE, NYSE: BCE) and Aggressive Focus stock Enel SpA (Italy: ENEL, OTC: ENLAY) are good examples.

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.