Over the weekend I read through Warren Buffett’s Annual Letter to shareholders, an item every investor should read. While it was extremely insightful, there was a bit in it that pertained to the topic I wanted to share with you today.
Warren Buffett has zeroed in on a little niche in the market that he believes has “recession-proof earnings.”
I like to consider it a stock market guarantee…
Unfortunately, there is no such thing as a true guarantee in the stock market. But there are a few little-known and widely overlooked stocks that exist today that are the next best thing…if not guaranteed, they are at least recession-proof stocks.
I would love to say that this group is an entire sector or even specific market, but the truth is there are only a select few stocks that present this opportunity today.
Utility stocks used to fill this small niche — once known as safe, stable income-generating stocks.
But that definition has morphed today.
Now utility stocks, otherwise known as power generation companies, can have volatile earnings and be anything but stable and safe.
That’s because the market has been deregulating over the past decade or so. It’s this unregulated utility market that almost all utility stocks have some exposure to, and there are even some that are completely composed of deregulated assets.
Since the unregulated power generation commands market prices, earnings and revenues tend to swing violently.
That’s not what I’d consider the next best thing to a guarantee.
Luckily, there are a few stocks that still operate in the regulated market, and I found one that is practically 100% regulated — Wisconsin Energy Corp. (NYSE: WEC).
A regulated power market essentially means that a utility company’s costs are covered. It’s known as a “cost plus” model. Wisconsin Energy can adjust rates to cover its cost, plus an additional amount to generate a reasonable return on its assets.