While investors are enjoying a current rally in the equities market, 2018 has spooked investors with a wave of volatility that put a sharp end to the nine-year bull market and dragged down some of last year's highest-flying stocks. As investors seek out companies most likely to fare well in another unexpected downturn, one veteran analyst on the Street spoke in an interview with Barron's pointing to stocks that he expects to outperform amid broader market swings. (See also: 4 Oversold Stocks Poised to Soar on Earnings.)
John Bartlett, co-manager of the Reaves Utility Income fund, which invests in power companies, as well as telecommunications and interstate gas properties, has chosen names such as Union Pacific Corp. (UNP), Comcast Corp. (CMCSA), AT&T Inc. (T), T-Mobile US (TMUS), Verizon Communications Inc. (VZ) and NextEra Energy Inc. (NEE) as among those best positioned to offer high dividends and returns as the market continues its roller-coaster ride.
Stocks for Better Sleep
"The outlook for utilities really remains very strong. Most of these companies have the ability to deliver growth around 5% to 7%," Bartlett told Barron's, citing strong dividends and earnings growth potential. As investors' fears regarding rising rates and an impending global trade war plague the market, he suggests that "utilities can remain a very safe haven for folks who have a hard time getting to sleep at night."
Reaves Utility Income fund, a close-ended fund with a four-star rating on Morningstar, focuses on delivering dividend yields well over 3% and lower-risk returns. Up to 20% of the fund can be invested outside of the utilities sector, in areas such as wireless providers and railroad companies. Over the past decade, Reaves Utility Income fund has secured annualized returns of 11%, compared to 6.6% for the MSCI World Utilities Index, as noted by Barron's. (See also: Why These 4 Big Tech Stocks Are Bargains.)
'Very Stable' Comcast
Cable company Comcast is expected to outperform as, over time, its broadband business becomes "very, very attractive," Bartlett told Barron's. He expects lower-quality video revenue to continue to be replaced by higher-margin non-discretionary broadband revenues, which should serve as a more durable, growing cash flow stream. As a result, the stock should see its valuation continue to strengthen over time. Trading at $33.53, CMCSA has declined 16.3% year-to-date (YTD) underperforming the broader S&P 500's 0.7% return over the same period as investors fear its involvement in a bidding war amid larger industry consolidation. Bartlett downplayed these concerns as "overdone," instead choosing to focus on growth in CMCSA's earning and free cash flow from its cable franchise.
America's 'Premier Utility' NextEra Energy
Bartlett applauded utilities provider NextEra Energy for its "wonderful track record of continually cutting costs and improving the reliability of its systmem." The analyst is also upbeat on its "very strong" regulatory relationship with the Florida Public Service Commission, which he indicates has already yielded returns for its rate payers and shareholders. In the interview with Barron's, the Reaves Utility Income fund vet dubbed NEE "an ESG [investing according to environmental, social and governance factors] dream, because you have a utility that continues to cut its carbon emissions and continues to improve its efficiency, and on top of that you have really the leading developer of renewable power in America."
'Value' Wireless Carriers
While Bartlett called the wireless market "brutal" in his interview with Barron's, he highlighted bright spots in the industry including T-Mobile, which he views as "the fiercest competitor out there." Despite a challenging environment, the analyst sees the sell-off in wireless stocks as an overreaction, leaving shares of companies such as Verizon priced at a "very good value." Plus, VZ, "one of the largest cash taxpayers in the country," has yet to see its stock move on benefits from the GOP tax overhaul, noted Bartlett. While Verizon and AT&T's large dividends probably won't move too much, the analyst noted that the stocks are "cheap and reasonably priced" given their relatively high dividend yields.