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Have the Stars Aligned for Utility Stocks?

Nov 15, 2018

 

  • Utility stocks are our focus today as record low temperatures are sweeping through the United States, specifically in the Northeast.  
     
  • Rising US interest rates in 2018, which are expected to continue through 2019, should work to benefit investors with exposure to utility stocks. Utility stocks are often seen as an alternative to investing in US Treasury Bonds, as utility stocks offer substantial stability with typically stronger yields generated from dividends. Rising US interest rates may put upward pressure on US Treasury Bond yields, making US Treasuries more attractive to investors -- this may, in turn, drive utility stock dividend yields higher.
     
  • As can be seen in the chart below, the spread between US 2-Year Treasury Bond Yields and the SPDR Utilities Select Sector ETF’s (XLU) dividend yield is near its 2018 low, currently at just 0.2952%. Could this drive a sell-off of utilities?
     
  • Correlation between the XLU and the SPDR S&P 500 ETF (SPY) is currently around 0, indicating little correlation between the S&P 500 and utility stocks.
     
  • Historically, utility stocks have shared inverse correlation with the general stock market, as they are often seen as a hedge due to their stable and consistent returns. Current levels of correlation which began to stabilize around 0 towards the end of October, however, suggest that there is a disconnect between utility stocks and the general stock market, as seen in the chart below -- perhaps this was caused by the global sell-off in October and current high levels of volatility in the broad stock market.
     
  • Rising US interest rate levels and record low temperature levels in the United States combine to reinforce a potential opportunity in utility stocks. Some potential utility stocks that you may want to consider are Atkore International Group Inc. (ATKR), which is rated as “Top Buy” in our US Industrials Global Top Stock Ideas and Generac Holdings, Inc. (GNRC), which is rated as “Top Buy” in our US Industrials Global Top Stock Ideas.

 

Source: Capital IQ, all charts