Utility stocks have received very little interest, despite a favorable environment. Here are five reasons why you should consider utility stocks now.
1. Low interest rates
The utility sector enjoys its best performance during periods of low interest. Utility stocks are traditionally highly leveraged, requiring large amounts of capital. High interest rates eat into utilities’ profits, and offer little wiggle room when it comes to retiring or refinancing existing debt.
However, the Fed plans to keep interest rates low until unemployment drops below 6.5% (and inflation remains checked under 2.5%), which means the outlook for borrowings remains favorable. The current employment growth rate suggests it will take another two years before the Fed considers a rate raise.
The Utilities SPDR (ETF) (NYSEARCA: XLU) currently yields 4.0%, which is attractive when compared to the bond yields. The 10-year treasury offers a paltry 1.9% and the 30-year only offers 3.1%. Utility stocks have the added attraction of offering capital growth. This makes them attractive to income investors, and provides a safe haven from more speculative issues.
3. They’re currently out of favor
For the past six months, markets have enjoyed significant gains. However, utility stocks have underperformed since the November bottom. The Utilities Select Sector SPDR is down 1.3% from the November low, compared to a corresponding 4.6% and 4.8% gain for Industrials and Financials, respectively. The only other sector to underperform utilities was the Technology sector, and that was all thanks to Apple. However, as traders look to take profits in outperforming sectors, money will begin to flow into “safe haven” sectors such as Utilities.
4. March is the cruelest month
We are entering a month which traditionally hasn’t been strong for utilities. This means utility stocks will continue to offer value, likely remaining outside the limelight of other sectors. For investors looking to build a position over time, it’s best done during periods when both selling and buying interest is low.
5. They look like a safer bet
The current bull market which is almost three years old. For many stocks, the best of the gains are long past. This will make it tougher to find the next big winner The conservatism typical of utility stocks could make them attractive to investors burned chasing alpha.
With these five factors in mind, the following utility stocks might be worth watching:
Equitable Resources
This utility’s knocking on the door of a move to new multiyear highs. The bar was originally set at $70.42, before a brief pop above $70 raised this to $71.62 in 2011. The stock is edging a break of $63 in low key action. Unlike many of its peers, it trades a ‘high’ P/E, but having reported earnings which beat analyst expectations on EPS.
Equitable Resources is impacted by lower commodity prices, particularly in natural gas. Gas-liquid volumes were up 13%, and transmission capacity reservation revenues grew 27%, but commodity prices were 21% lower than last year. This brought a drop in year-on-year EPS. Weak commodity prices are hiding good performance in its underlying business. Natural gas prices, while weak, have stabilised in recent years, and this will provide the foundation for the next move higher and offer the ground work for Equitable Resources to benefit.
