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Executive Summary

Reap Before You Sow

By Roger S. Conrad on May. 8, 2016

We’ve enjoyed the recent rally in equity markets immensely, with our laggards finding their footing and a handful of the names in our Conservative Income Portfolio hitting all-time highs.

But stretched valuations increase the risk that results will disappoint the market’s lofty expectations. When investors disregard valuations to pay this much for dividends, the risk of a selloff increases.

Meanwhile, first-quarter results from the essential-service companies that we track in our Utility Report Card reveal warning signs that corroborate our concerns about weakness in the US economy.

a number of electric and gas utilities reported slumping sales to industrial users. Although utilities generate the preponderance of their cash flow from residential and commercial customers and shouldn’t be troubled by this headwind, weakness in this segment suggests that activity in this part of the economy have continued to slow.

Against this backdrop, investors should continue to exercise caution on cyclical businesses and names with excessive leverage. You can also play offense by setting limit orders to buy high-quality utility stocks at dream prices that would only be hit in the event of a significant pullback in the broader market.

None of the 214 essential-service companies that we cover announced a dividend cut over the past month.

But elevated valuations and potentially slowing growth suggest that investors should consider reaping at least a partial profit on some of the gains earned during the recent rally. Those looking to deploy capital should scrutinize the soil before they sow their seeds.

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