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Utility Stocks Starting to Surge

18 April 2013 in Trading Ideas

The big selloff in stocks on Monday coincided – no surprise – with a jump in the jitteriness of investors. The Volatility Index touched three-week highs, which doesn’t seem like a big deal, but it’s a level that’s only been seen three times in 2013.

The index retreated on Tuesday, but remains elevated from its lows of the year seen a month ago.

With stocks now hanging around a range they’ve traded for the past three weeks, and a recent unemployment report that wasn’t hugely bullish on the state of the labor market, it stands to reason that defensive stocks, including those paying dividends, could attract the attention of investors.

Utility Bills MotifUtility stocks have had a pretty decent run of late. The Utility Bills motif, for example, is up 8.5% so far this year and has risen 27.0% in the past 12 months.

This portfolio of stocks, by the way, involves a small twist on how utility equities are generally thought of. This motif is weighted by almost two-thirds with stocks of telephone and cable TV companies.

But the general thesis is still the same: in down or stagnating economic times, a lot of purchases will go by the wayside, but people will continue to pay to heat and cool their home, they’ll pay their water bill, and they’ll continue to pay water and cable TV bills.

However, some evidence also exists for some fundamental upturn in “real” utilities. Total electricity consumption grew in January from a year earlier, and natural gas prices have rallied in recent weeks to a level that’s now double where they were in 2012.1

While another broad market rally could have this defensive sector losing some luster for investors, any further evidence of sustained demand, coupled with still-attractive dividend yields, could keep these stocks in favor.

1Lior Cohen, “Will the Rally of Utility Companies Continue?”, fool.com, April 12, 2013, http://beta.fool.com/liorc/2013/04/12/will-the-rally-of-utility-companies-continue/29804/?source=eogyholnk0000001, (accessed April 16, 2013).