Wall Street’s Great Utility Stock CYA

But what goes down will rise again if the business stays solid

The Dow Jones Utility Average plunged by nearly -12 percent over two weeks starting in mid-September. Even industry leader NextEra Energy (NYSE: NEE) was at one point down more than -41 percent for the year.

Then just as suddenly, NextEra shares bounced back more than 20 percent in less than a week. The DJUA surged nearly 100 points off its lows. And the biggest utility winners were the stocks that suffered most during the selloff. For example, AES Corp (NYSE: AES) is up nearly 50 percent since early October.

That’s quite a whipsaw for a sector known primarily for its highly predictable earnings and dividends. And ironically, business steadiness is exactly what utility investors have again enjoyed this Q3 reporting season.

With all but a few dozen companies in my Conrad’s Utility Investor coverage universe reporting in, results and updated guidance for regulated utilities have closely tracked management’s earlier projections. In fact, business results have been arguably strongest at the companies whose stocks sold off the most.

AES Corp, for example, raised its 2023 earnings guidance to “the top half” of its previous range of $1.65 to $1.75 per share. Management affirmed its long-term growth yearly earnings projection of 7 to 9 percent through 2025, as well as 17 to 20 percent target EBITDA growth through 2027. And it reported 3.7 gigawatts of new renewable energy contracts year to date, with 3.5 GW on track to enter service and start generating cash flow by the end of the year.

AES’ results reflect continuing strength in demand for renewable energy, especially from corporations anxious to lock in a long-term price for electricity. So did numbers and guidance at producer Brookfield Renewable Partners (NYSE: BEP, BEPC) and project financier Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI), whose stocks have also been beaten up on this year.

Even battered Dominion Energy (NYSE: D) had significant good news for investors in its Q3 report. The now under construction Coastal Virginia Offshore Wind (CVOW) facility will produce electricity for $77 a megawatt hour. That’s versus an earlier forecast range of $80 to $90.

Judging by the headlines, investment media and the Wall Street pundits who feed it would have us believe the utility stock price whipsaw is the result of changes in policy from the US Federal Reserve. That’s patently absurd. The Fed has basically made no major moves since summer, instead keeping benchmark interest rates steady this autumn.

Rather, what actually happened is certain influential investors got it dead wrong about utilities’ actual exposure to interest rate policy. And in today’s top-heavy stock market—where a handful of firms dominate trading—it didn’t take much from them for the rest of the herd to stampede.

Over the past year or so, there’s been evolving group think that utilities are facing a day of reckoning as the result of “higher for longer” interest rates. So goes the theory, higher borrowing costs will inevitably force companies to reduce capital spending, which is the primary fuel for earnings and dividend growth guidance.

So far, there’s been little or no evidence to support that theory. Q2 earnings reports and guidance updates were almost universally solid, as were Q1 numbers and before than results for Q3 and Q4 2022. Nor was there any indication from utilities that developments in Q3 were triggering any serious recalibration.

Nonetheless in late September—when NextEra Energy (NYSE: NEE) announced it was temporarily suspending asset sales/drop downs to its NextEra Energy Partners (NYSE: NEP) affiliate—these investors took it as confirmation of their theory. And rather than waiting for Q3 results to see if companies were actually so affected, they sold en masse.

No doubt those paying attention are now regretting making that decision. And while the Fed may not be finished raising interest rates, I suspect the spike we’ve already seen in several stocks indicates some utility sellers are already reestablishing positions.

That’s the nature of the business. And investors can expect more, not less, of the same resulting volatility going forward. But there are certainly several lessons we can take away from this.

First, realize that anyone making a forecast in advance of actual earnings releases is doing so based on imperfect information. Whether they’re making seven or eight figure salaries or are publishing a blog on Seeking Alpha, all they’re really doing is making an educated guess.

Second, recognize that there’s a pecking order even among the most respected analysts. When the most influential make a move, the others are likely to follow en masse. That creates the impression that all of the “experts” have come to the same conclusion, when very likely most are just following along for fear of being caught out.

Third, a research house is going to do what it takes to maintain the confidence of those paying for its research and recommendations. That’s the case whether the product is published numbers for individual stocks and sectors, or a trading algorithm. And unless someone is very, very secure in their job, when a recommendation sours there’s going to be a lot of what can politely be called CYA, including outright obfuscation.

I started in the investment publishing world back in the 1980s. So I’ve definitely seen my share of editors, marketers and publishers sweep recommendations that didn’t work out down the memory hole.

We don’t indulge that urge at Capitalist Times, however uncomfortable publishing our dirty laundry may be. But it’s pretty much still standard practice in the industry to cover up the bad calls. And however more “respectable” the institutional money world may seem, it’s the rule there as well.

That’s why I don’t expect to see a mea culpa from the big boys regarding this utility stock whipsaw—despite the fact that it no doubt convinced all too many investors to bail out at the worst possible prices. All we can really do is resolve to think for ourselves, to always be skeptical when a particular viewpoint becomes nearly unanimous and to distrust prevailing market emotions when they’re running highest.

As for utilities, Q3 results and reaffirmed guidance is proof positive that companies are adapting to the headwind of higher for longer interest rates. And while the risk of even higher interest rates and a potential recession are still considerable, that’s all the reason I need to hold the best in class—as well as to take advantage of the occasional madness of crowds to add to positions from time to time.