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Executive Summary

Utilities Have Momentum, We Stay Focused on Value

By Roger S. Conrad on Apr. 8, 2019

2019 has started out with a bang for utilities and essential services stocks. The Dow Jones Utility Average’s 10.2 percent first quarter return was one of its best showings in history. And the 38 stocks in our Conservative Holdings, Aggressive Holdings and Top 10 DRIPS are higher by 15 percent.

This positive momentum is certainly a welcome change from lackluster 2018, and particularly the vicious fourth quarter selloff. But it also brings reasons for investors to be wary.

First, really big openings followed by fantastic finishes are extremely rare for utilities, the most recent being in 2000. Typically, stock prices level off in the following months. I’m encouraged that our Portfolio gains were more driven by positive business developments at individual holdings than the sector surge. But with the DJUA marking a new all-time high last month, utility valuations are back in the stratosphere.

From all indications, most Utility Report Card companies should report strong first quarter earnings and guidance updates in the coming weeks. But catalysts for further upside now face a high bar. It’s also noteworthy that more than a few best in class names lagged in the first quarter, despite very strong business performance.

As I pointed out in the March 21 Income Insights “The Fed Turns a Page,” the Federal Reserve’s decision to terminate its monetary tightening cycle carries a huge positive for capital intensive companies like utilities: A big drop in borrowing costs that’s provided a fresh opportunity to lock in cheap, long-term financing. This month’s Utility Report Card comments highlight this advantage, as well as analysis of other Quality Grade criteria.

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