Power up
As earnings season unfolds investor’s
attention is turning to companies that have sustainable business models with an
expectation of developing scalable growth for the foreseeable future. Thus far, the amalgam of businesses that have
accomplished that feat this quarter is quite broad, hence the run-up in stocks.
But more importantly, one must focus
upon quality over quantity, consistency versus heroism.
Thus, our research is developing an
unusual bent regarding the mania over artificial intelligence (AI). By digging a little deeper we are tackling
this new technology with an old approach: looking at the infrastructure
required to bring these technologies online, namely energy and utility
equities.
Although far less glamorous than
discovering unique “techno-darlings” these sectors are essential to the
underpinnings of a new world order that is about to burst onto our
horizon. To ensure that the power is
turned on when the AI switch is pulled there has to be a reliable energy
grid. The establishment of an AI social
and business compact depends upon complete operational and distribution
support.
For eons your parents and
grandparents used the energy/utility consortium as supplements to their
investment portfolios’ income and capital gains objectives. Today, we would argue, that strategy makes
even more sense. Their standing in their
local communities, the regulation under which they operate, and the function
they satisfy allow these companies to operate as fulfillment centers for homes
and businesses. Additionally, they resemble
many of the “better mousetrap” objectives that we look for in our
research. Their vital place in the
technology realm make them an underappreciated resource for burgeoning
tech. It’s not an exaggeration to say
that as goes mainstream utilities so goes artificial intelligence.
Boring? Maybe!
Now, while utilities and energy
companies aren’t “sexy” to talk about, sometimes stating the obvious makes for
better outcomes. In fact, for nearly
four decades, my databases have enabled the creation of several silo-specific
portfolios in areas such as health and life sciences, water, agriculture, fixed
income, and alternative energy. Our
fixed income research, for example, has allowed us to maximize dividend yield
in our portfolios while maintaining “laddered liquidity” in the event of
massive economic shifts. Our current
affinity for the utility sector is both a call for defensiveness against rampant
equity valuation expansion overall, as well as a generational realization about
the development of new technologies and infrastructure. What was once “old” is new again. Utilities today are not your grandparent’s
annuities. They are high tech solution
providers to the globe’s ever-expanding technology base.
As such, the need to create viable
energy sources goes well beyond traditional fossil fuel companies, and includes
hydro, nuclear, and wind.
Finally, why is our research bias
turning defensive; why infrastructure; why shy away from the glitz, glitter,
and hype? Because defense limits
volatility. Drawdown is the most onerous
of portfolio penalties. Defense is the
opposite of cyclicality; it makes it unnecessary to try to ride the biggest
wave….or crash when your bet is incorrect.
Defense obviates the effect of exogenous noise when speculation is
running hot. Irrespective of last week’s
Fed announcement about interest rates, there is always a time and place to
diversify risk, maximize yield, and protect against downside capitulation. Playing the waiting game while collecting
dividend income is an effective way to parlay capital accumulation from financials,
utilities, and energy companies without the equity combustibility (no pun
intended).
Making the investment process less
complicated is good common sense, and good strategy, too.
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