Welcome to my latest video presentation for Mind Over Markets. I’m taking a break from the market’s daily roller-coaster action to interview my colleague Robert Rapier, chief investment strategist of Utility Forecaster, Income Forecaster, and Rapier’s Income Accelerator. The article below is a condensed transcript; my questions are in bold.

Utility stocks are subject to interest rate risk. Accordingly, as the Federal Reserve has tightened, the utility sector has underperformed so far in 2023. What’s your prognosis for utility stocks for the rest of this year and in 2024?

These things are all cyclical, right? During a typical business cycle, different sectors historically perform differently during the different cycles. For instance, energy is a consistent top performer during the late business cycle, and energy has been the top performer over the past couple of years.

But then when recession follows, consumers retreat to defensive sectors like utilities, health care, and consumer staples. These sectors are of considerable interest during the late business cycle.

Not only do these three sectors generally outperform during this phase (all three outperformed the S&P 500 in 2022), but they are consistent outperformers during the recession phase. If the current business cycle had followed the typical pattern, those sectors would typically outperform the broader markets.

But the market seems to have skipped past the recession phase and is performing more like an early-stage business cycle, where you see outperformance in sectors like technology and consumer discretionary, which are the top performing sectors this year. I think one of the issues is that investors are forward looking, and anticipating right past any possible recession and into recovery.

Utilities have faced interest rate headwinds, but I think when it’s clear that the interest rate hikes are over, we will see utilities begin to outperform. It may be too early to see that in the second half of this year, but I think we will see utilities start to bounce back in 2024.

We all know about renewables such as solar, wind, and geothermal; “green” alternatives are obvious and they get plenty of media attention. But what about stealthier technological developments that deserve attention from investors?

There are a lot of themes that should perform well if one takes a long-term approach. I am particularly fascinated by artificial intelligence (AI), and how that will all shake out. There are a lot of competitors in this space, and it’s not clear to me what the best path to monetization will be.

Thirty years ago, I thought biotechnology was a great long-term play, and I invested accordingly. My biotech holdings have outperformed everything else since then. But looking forward to the next 30 years, I think AI, robotics, and cloud computing will be important themes. And biotech still has a long run ahead.

One more area that is going to become increasingly important, which isn’t like the others I mentioned, is water. Freshwater is becoming scarcer, and companies that provide that should do well. That would be a more conservative play on the future than the sectors I mentioned previously.

I’m particularly interested in energy storage. Do you see any under-the-radar opportunities in that segment?

It’s certainly a topic that has fascinated me during my career. I have worked on a couple of unconventional energy storage projects in the past. Energy storage is really the holy grail that will enable intermittent renewables to power a much greater share of our energy demands.

I think the scalable, widely deployable solution is going to end up being batteries. There are some novel battery chemistries that are ideal for stationary storage. Some of these are heavy batteries that are entirely inappropriate for mobile applications, but they are cheap solutions for stationary utility-scale storage. So far, there are a lot of competitors, but nobody has yet taken control of market share in this space.

Due to worries about climate change, nuclear power has made a remarkable comeback. What’s the best way for investors to profit from the renaissance in nukes? For example, uranium producers have been thriving as the price of “yellow cake” soars.

If we are going to get serious about curbing carbon dioxide emissions, nuclear power has to be ramped up. But southeast Asia is really the global hotspot in emissions, so that’s where they need to be retiring coal plants and building nuclear plants.

There are a lot of utilities that use nuclear power, and a lot of companies that provide services for designing and building nuclear power plants. But that’s always a small part of the business of these companies. As you allude to in your question, if you really want a pure play on nuclear power, look to the established producers like Cameco (NYSE: CCJ), whose stock has already risen by more than 200% in five years.

The Federal Reserve is expected to soon “pause” its tightening cycle and actually implement interest rate cuts starting in early 2024. Won’t the Fed’s change in course prompt investors to gravitate to utility stocks?

Yes, I think that will be the catalyst that will spark a recovery in the utility sector, although the gas sector has gotten hit by warm winters as well. So, if we see a cold winter, you could see a recovery in the gas sector regardless of what happens with interest rates.

A lot of income investors focus on current yield. Explain why a history of dividend growth is important, too.

Long-term (sustainable) dividend growth shows that a company is well-managed and can support the income needs of investors. But it’s not just dividend growth. You have to ensure that the growth is sustainable. Some companies have supported dividend growth by adding debt, and if that’s a pattern that continues, eventually it will lead to trouble.

You want to find companies that are supporting dividend growth by growing cash flow. That’s a sign that you have a winner that you can put in your portfolio for the long haul.

Thanks for your time.

Editor’s Note: If you’re looking for ways to generate steady income, regardless of the market’s ups and downs, consider my colleague Robert Rapier.

Robert Rapier is chief investment strategist of our premium advisory, Utility Forecaster. No one understands dividend-paying stocks better than Robert.

After painstaking research, Robert found a rare type of investment that has raised its payouts by double-digits every year for the past 16 years. If you’re tired of anemic payouts, Robert has the remedy. Click here for details.

John Persinos is the editorial director of Investing Daily.

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