Prepared for What’s Next

For the 18th time since World War II, the S&P 500 Utility Index has given up more than 10 percent of its value from its most recent high. Does this pullback represent a healthy breather after a breathless run-up, or the start of a bigger correction?

This month’s feature article explores the factors driving recent weakness in utility stocks and the potential for further downside.

Over the past year, we’ve emphasized the importance of selling names that show signs of weakness in their underlying businesses and booking partial profits on stocks that have reached unsustainably high valuations.

We’ve also taken advantage of the market’s inclination to sell first and ask questions later when valuations become stretched, picking up shares of high-quality names that pull back on temporary hiccups. With utility stocks trending lower, we highlight some of the names that have dropped below our buy targets for the first time in a while.

This issue also reintroduces our list of dream prices for all our Portfolio holdings. Our favorite essential-service stocks will only reach these extreme valuations in a flash crash or panic-driven selloff, but this strategy gives us a shot to set ourselves up for windfall gains when there’s blood in the street.

Fourth-quarter earnings season is in full swing. You can find our take on results from the 28 companies that have reported thus far in the Utility Report Card. We plan to update our comments on the remainder periodically as earnings come in over the coming weeks; we’ll keep you apprised of our progress via regular updates.