Conventional wisdom holds that October is a dangerous month for stocks, which means that investors must think unconventionally to get ahead.
Consider that the Dow Jones Utilities Average has generated a positive total return in 31 of the past 45 Octobers. And despite the recent downdraft in the broader market, this index has rallied 2 percent thus far in October.
Investors should also note that since 1969, the Dow Jones Utilities Average has tumbled in the final two months of the year only four times after posting a loss in October.
Three of these instances—1973, 1987 and 2008—were full-blown market crashes. The other year-end downdraft occurred in 1993, when California ignited a firestorm by proposing radical changes to the electricity market.
In other words, utility stocks usually rally in October and enjoy a strong fourth quarter.
Although the scare-mongering financial media takes every opportunity to stoke fears about global deflation, the spread of Ebola and slowing economic growth in Asia and Europe, October 2014 shares little in common with fall 2008
Despite an explosive five-year bull market and plodding US economic recovery, corporations and governments alike continue to de-risk operations and balance sheets.
The happy result: Even many junk-rated corporations have the flexibility to pull bond offerings when credit conditions tighten.
Last week, B1-rated master limited partnership BreitBurn Energy Partners LP (NSDQ: BBEP) cancelled a $400 million bond offering, for which it would have paid 8.5 percent interest.
The first third of October has brought its fair share of turbulence to the broader market, with the energy sector bearing the brunt of the pain. This downdraft has hit the Alerian MLP Index, which has given up more than 8 percent of its value this month.
More downside could be in the offing; the market has been overdue for a breather. Investors should regard further weakness as an opportunity to buy high-quality names, many of which had traded at stratospheric until recently.
The October issue of Conrad’s Utility Investor highlighted four unconventional investment opportunities and the best stocks to take advantage.
The strengthening US dollar has punished stocks priced in foreign currencies for the past 12 months.
On the plus side, formerly expensive stocks in Canada, Australia and elsewhere have pulled back to favorable price points for patient investors.
Opportunity No. 2: Irrational Fear of Rising Interest Rates
Despite what you may have heard, rising interest rates don’t necessarily spell doom for utilities and other dividend-paying stocks.
First and foremost, these equities offer the potential for dividend growth; rising interest rates are more of a headwind for bonds, a security class that pays a fixed coupon.
More important, stocks have scored big gains in years when interest rates have climbed significantly (2009 and 2013) and underperformed when rates have tumbled (2008).
Nevertheless, plenty of investors view these stocks as bond proxies and have bet against them. Short interest in some of the highest-yield names in my Utility Report Card, which covers more than 200 essential-services stocks, has reached levels that could set the stage for en epic squeeze.
Earlier this year, we booked profits of more than 50 percent on regional telecoms Windstream Holdings (NSDQ: WIN) and Consolidated Communications (NSDQ: CNSL), both of which surged after improving results and unexpected moves to unlock value squeezed the shorts. (See An Early Birthday Present from Windstream Holdings and Book a 54% Gain on Consolidated Communications.)
The price of Brent crude oil has tumbled since late June, catalyzing an indiscriminate selloff in the energy sector. Even midstream companies without direct exposure to commodity prices have taken a hit.
With Saudi Arabia keen to preserve market share in the US, West Texas Intermediate crude oil could slide into the $70s per barrel before finding a bottom. On the supply side, the expense involved in incremental production growth should ensure that today’s low prices don’t last over the long haul.
The selloff in many of our favorite midstream master limited partnerships (MLP) appears overdone; this pullback represents the opportunity we’ve been waiting for.
The financial media always focuses on the big-ticket races in each election cycle; this time around, control of the US Senate is at stake.
Although we monitor political developments and their investment implications closely, the real victor at the national level will be more gridlock.
For utility stocks, results of key gubernatorial elections will hold more sway over utilities’ prospects, as the victors will appoint regulators. In some instances, these changes could be sanguine for relations between utilities and regulators; in other cases, these interactions could become far more hostile.
Utilities Navigate Energy Politics highlights what’s at stake in several key gubernatorial elections, while the November issue of Conrad’s Utility Investor will analyze election results. Based on the winners and losers in the political arena, I’ll highlight my picks and pans in the utility sector.
If you haven’t already subscribed to Conrad’s Utility Investor, learn more about the publication’s valuable features and how you can save $50 on a risk-free trial.
The longer the current correction lasts, the better the buying opportunity for savvy investors. My buy targets in Conrad’s Utility Investor reflect a common-sense balance of risk and reward, informed by almost 30 years of covering utilities and other essential-services firms.
My shorthand measure for prospective returns: current yield plus dividend growth, as prices of dividend-paying stocks tend to follow their payouts over time.
The Utility Report Card also features my easy-to-understand Quality Grades (A for the best, F for the worst) that rank the more than 200 essential-services stocks that I cover by risk.
Here are the main criteria that I factor in to this proprietary metric:
In a bull market, the good, the bad and the ugly all rise. But investors build sustainable wealth by buying high-quality stocks when the broader market sells off or these names suffer a temporary hiccup.
A rational analysis of risk using the above criteria—coupled with a conservative look at prospective returns—is the best way to identify good buys that will stand the test of time.
There are no worthwhile shortcuts in security analysis. But my studied approach to investing has uncovered new opportunities where less experienced investors see none.
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.