Are you interested in energy stocks, high yields or utilities? Then don’t miss the advice in today’s Investment of the Week, the latest installment in our Dick Davis Digest Contributor Interview Series.
Today I’m talking to Roger Conrad, a long-time Digest Contributor who has just launched three new investment advisories. Energy And Income Advisor, produced with Elliott Gue, covers the energy sector from growth stocks to high-yielding MLPs. Roger Conrad’s Utility Investor, launching this month, is the successor to Conrad’s Utility Forecaster, the utility-focused letter that he founded and wrote for 24 years. And Capitalist Times, also launching this month, will cover a broad range ofinvestments with contributions from many different analysts.
Read on to learn more about Conrad’s new ventures and some of his favorite places to invest today.
Chloe Lutts: Roger, would you tell us a little bit about your background? How did you get into this business?
Roger Conrad: I was back in my hometown of Memphis, Tennessee, after earning a Masters of International Management from the Thunderbird School of International Management, class of 1984. My first target was a job in international banking, but I quickly found out that the Latin American debt crisis of the early/mid-1980s had stalled hiring. So instead, I loaded up my 1969 Volkswagen Beetle and drove to Washington D.C., where some T-bird buddies were living. I had some pretty advanced interviews with the Overseas Private Investment Corporation and a couple of similar organizations involved in global project finance. Unfortunately, that’s when the federal government put on a hiring freeze, so I was 0-for-2. I worked for a bit as a technical writer to make ends meet.
Then a friend told me about a job at what was then KCI Communications, where I could answer letters and phone calls from subscribers of the company’s stock market advisories. I jumped at the chance and so began my education in the investment business, and of individual investors in particular. Within a few months, I was writing articles myself, including for Richard E. Band’s Personal Finance, which at the time had well over 100,000 readers. And in 1989, I got my big chance and started Utility Forecaster, for which I was the sole editor, strategist and contributor right up to my final issue in May 2013.
CL: Why did you decide to found a letter focused on utilities?
RC: My interest in utility stocks was piqued by working under then-PF editor Richard Band. As a practitioner of Contrary Investing, he had done very well recommending utilities from their historic bottom in the early 1980s, and the sector was quite popular with readers for their gains in that decade as well as dividends and safety.
My first sector beat was producing a report on utilities that was used as a renewal bonus for PF readers. I wound up writing the advertising piece for the report as well, and it was wildly successful. When the company wanted to do a quarterly report focusing only on utilities. I jumped at that too. It also proved popular and the result was the monthly Utility Forecaster launched in spring 1991.
I guess what really appealed to me about utilities was the fact that they run big systems that are so fundamental to a functioning economy, and they really do touch everything. Despite their reputation, they’re never boring. In fact, making good sector investing decisions depends on staying on top of a wide range of issues from the environment to federal, state, local and even global politics.
The best utility stocks also offer growth. When I started in this business, inflation was a real worry for investors. But I noticed that even for dividend-paying stocks, growth could offset the impact. Consequently, every income investment I’ve recommend ever since has had a growth component attached, just as utility stocks do.
That’s not a conventional philosophy. In fact, most brokers and advisors seem to act like growth and income are two separate objectives. I don’t think you can have one for very long without the other. And fortunately, I’ve been able to find a large number of yield paying investments over the years that have that growth component, whether it be growing earnings or being priced in a currency like the Canadian dollar that keeps pace with inflationary pressures.
My favorite companies also produce something essential, like electric power or operating pipelines. The crash of 2008 showed that in a real calamity almost everything drops. But the more essential a company’s product is, the less its underlying business will be damaged by a crash in the market. And as we saw after the March 2009 bottom, strong companies always recover from stock market damage, no matter how severe, so long as they remain healthy on the inside.
CL: What can subscribers expect from you now that you’re out on your own?
RC: My paramount goal over 27 years in this business has been to help readers build wealth year-in, year-out, primarily in high quality stocks—but also to ensure they understood what would shape the returns from the investments I recommend. My analysis is heavy on business fundamentals and dividends, and I work hard to be sure readers get all the important information they need to make decisions.
I have a pretty decent track record. Under my editorship, Utility Forecaster routinely rated very highly in Hulbert Financial Digest, and I’ve been told many times my renewal rates are among the industry’s highest. But I have made plenty of mistakes and will make many more so long I’m in the business, which I intend to be for many years. What I can promise readers is that I will never run away from my mistakes. The losers in fact will often get more coverage than the winners, and I will continue striving to make sure readers know everything they need to about both.
CL: Specifically, what kind of investments will Energy and Income Advisor, Capitalist Times and the new Utility Investor each recommend?
RC: With Energy and Income Advisor, we’re combining our expertise in Canada with master limited partnerships and other energy stocks, ranging from the new breed of producer “trusts” in the U.S. to drillers and renewable power generators.
What we’re looking for is companies that are able to grow their businesses from cycle to cycle. Energy prices are going to rise and fall. But companies that continue to boost their productive base of assets will continue to build wealth. Those are also the companies that have the best balance sheets and best support their dividends.
Energy stocks can be quite volatile, even those of companies that are not directly impacted by commodity price swings. So we try to time our purchases to buy when the sector is less popular, and occasionally to take profits when stocks get ahead of themselves.
We will take a flyer from time to time on a higher-risk stock. But when we do so, we also make a point to identify the risks, so readers can make decide whether they want to take on greater danger for the prospect of fatter gains.
With Capitalist Times, we’re focusing on the broad market and a wide range of sectors, utilizing the talents of analysts we’ve come to trust and respect as contributors. We’ll be offering Growth and Income Portfolios, mostly high quality stocks but also with the occasional flyer.
Utility Investor is basically the continuation of the essential service sector coverage I’ve been doing since 1989. Portfolio companies enjoy an advantage over stocks in other sectors, mainly because they’re very reliable businesses that can withstand the cycles. And dividends are of course a major theme. But again, I will look at riskier stocks from time to time if the potential reward is great enough, and the odds of success appear greater than what the market expects.
CL: What’s one of your favorite stocks to buy today, from any sector?
RC: We’ve seen a pretty steep run-up in some areas of the energy patch, mainly the companies that investors have deemed to be safest. The same is true of dividend-paying stocks. That includes the vast majority of MLPs that operate pipelines.
One MLP that’s still trading below what I consider fair value is Energy Transfer Partners (ETP). This company has a very stable and growing portfolio of midstream energy assets, including pipeline systems for both natural gas and liquids, meaning oil and natural gas liquids. It’s made a series of very successful acquisitions of assets, thanks to aggressive moves by its general partner Energy Transfer Equity (ETE). And it appears set for more growth this year by asset additions, including a potential merger with Regency Energy Partners (RGP), which shares ETE as a general partner.
Despite these strengths, Energy Transfer Partners still yields well over 7%, while other similar MLPs are yielding less than 4%. That’s a huge discount and it’s due to Energy Transfer’s lack of distribution growth since mid-2008. I look for a distribution boost later this year to generate a more normal valuation for this MLP, and a sizable capital gain.
CL: What’s one important piece of advice you think more investors need to hear?
RC: I think it’s to practice diversification and balance, now more than ever. That means being willing to take a profit in big winners that have gone up so much that they’re out of balance with the rest of your portfolio. It’s normal that investors generally focus on falling stocks as the greatest threat to their portfolios. But ironically, the further a stock falls, the less damage it can do to you. But the stocks that have risen the most are most vulnerable to disappointment, and if they’re out of balance with the rest of your holdings, your overall portfolio will suffer commensurately.
Note that I’m not a fan of averaging down in falling stocks either. Investors’ emotions tend to rise as they increase their bets on a stock. And while most fallen stocks do recover, some don’t. And for most people, the more money they have invested, the harder it is to cut and run.
CL: Moving from investors’ personal mistakes to general challenges, what do you see as the biggest challenge in the market right now?
RC: I think it’s momentum. We have a market right now that’s dominated by institutions charged with maximizing returns over particular calendar periods. Most can’t afford to wait past December 31st for a battered stock to rebound, so their selling adds to the damage already suffered. Conversely, they can’t afford to watch a stock or sector take off without them, so their buying magnifies the gains.
If you can take a step back, you’ll see that momentum often reverses sharply. Sooner or later, a stock that’s taken off has so many expectations attached to it that it can’t possibly meet them. And when there’s a whiff of failure, it collapses. That’s what happened to Apple (AAPL) recently, for example, even though the company is still growing revenue robustly. Conversely, it doesn’t take much good news to start a rally in battered stocks, so long as the underlying company isn’t itself collapsing.
The challenge we face as investors is to stand our ground when momentum takes stocks up or down and out of whack with what appears to be fair value. A safe dividend is a powerful centering force for eventually breaking momentum one way or the other. If we can do a good job on forecasting the dividend, we can use momentum to buy low and sell high routinely. But if we get caught up in the momentum, we’ll be dragged down by it.
Overall, this market still has some things going for it, including the lowest corporate borrowing rates in decades and very little inflation. If history is any guide, those forces could continue to take the market averages higher. How individual stocks fare, however, will depend on momentum, which is shaped by expectations. And regardless of how high the averages go from here, that’s what will determine the returns individual investors earn.
CL: Good advice. Before I let you go, tell us a little more about yourself—what else do you like to do besides investing?
RC: I’m an avid backpacker and boater and fortunately we have a lot of both in the D.C. area. This summer’s challenge is two weeks of hiking in the high desert of New Mexico with my son’s scout troop. I enjoy biking, golf and playing guitar and I’m a big Washington Nationals fan, which up until recently has been fruitless, but we’re hopeful.
CL: Sounds fun, and good luck to your team. Thanks for talking to us today!
RC: Thanks for interviewing me.
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
P.S. I just finished choosing 30 great new income securities—stocks, trusts, ETFs, REITs and mutual funds—for the latest issue of Dick Davis Dividend Digest, and I’d like to send it to you free.
Get this month’s best high-yield stocks here.
