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Feature Article

Election 2016: Plenty of Good News for Utilities

By Roger S. Conrad on Nov. 15, 2016

Republicans’ promises of massive federal spending, tax cuts and an unprecedented rollback of regulation have pushed the stock market to new highs since election night.

Utility stocks, however, have sold off amid fears that President-elect Donald Trump’s policies will stoke inflation and put the brakes on renewable-energy development.

Never mind that the primary argument against utility stocks in recent years has been that adoption of distributed solar power would push incumbent power producers into a death spiral—a sensationalist claim that hasn’t been borne out. (See Barron’s Bashes Utility Stocks for All the Wrong Reasons.)

And as we’ve pointed out repeatedly, the Dow Jones Utility Average historically has exhibited scant correlation to interest rates over the long term; earnings and dividend growth ultimately drive returns for the sector.

If the federal government’s policies under President-elect Donald Trump accelerate economic growth, utilities will benefit.

With utility stocks trading at elevated valuations heading into the final day of the election, these developments gave investors an excuse to rotate out of this defensive sector.

Although this selloff has hit our model Portfolios, investors who followed our lead and took partial profits off the table when our picks traded at unsustainably high valuations should have a decent supply of dry powder. And our position in ProShares UltraShort Utilities (NYSE: SDP) has gained more than 23 percent since July 11, 2016. We’re sticking with this bet on more near-term downside in utility stocks.

But investors shouldn’t mistake the selloff in utility stocks—and our efforts to capture some upside from this move—as a sign of deteriorating fundamentals or challenges created by the election.

In fact, many of the ballot initiatives and gubernatorial elections that we identified as meaningful for electric utilities in Focus on Policy, Not Politics and Election 2016: What’s at Stake for Utility Stocks? worked out in the industry’s favor.

Changes in which party controls three, and possibly four, governors’ mansions promise to improve formerly contentious regulatory environments. And voters rejected rooftop solar-power companies’ campaign to shake up the Arizona Corporation Commission.

At the federal level, utilities would also benefit from reduced corporate taxes, relaxed regulation and government spending on infrastructure.

Questions remain about what policies President-elect Donald Trump will enact. But this year’s election results have enhanced utilities’ capacity to build wealth for shareholders over the next three to five years—and their stocks will be better buys than ever when valuations come down a bit more.

For the companies in our coverage universe, most of their contact with the federal government involves four regulatory agencies: the Federal Energy Regulatory Commission (FERC), the Federal Communications Commission (FCC), the Nuclear Regulatory Commission (NRC) and the Environmental Protection Agency (EPA).

Federal Regulation: Gas & Power

FERC, the FCC and the NRC are large organizations where policies are set by a board of five commissioners who serve staggered terms. By law, the president can appoint three board members from his or her own party and two from the opposition. The US Senate then confirms these appointees for multiyear terms.

Under President Obama, the Democrats had operational control of the boards of these agencies and set the agenda. Under President-elect Trump, Republicans will determine the priorities. Change, however, may come more slowly than most expect.

Although the new president will be able to name a new FCC, FERC and NRC chairman immediately, the current commissioners can serve out their terms if they so desire. FCC Chairman Tom Wheeler, for example, still has a couple years left in his term, even if he is replaced as chairman.

And thanks to the gridlock between the White House and Congress over the past two years, these regulatory agencies have an unprecedented number of vacancies. FERC’s five-member board, for example, currently has three Democrats and no Republicans. And Chairman Norman Bay’s term won’t expire until mid-2017.


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