After yesterday’s 1.4% advance, the utilities sector once again took the lead as the best performing major sector in the U.S. market in 2014. I discussed the technical situation in last month’s MorningWord, when the Dow Jones Utility Index broke out to a new all-time high:
As part of the back and forth action in the utilities sector in the past few months, both implied and realized volatility have gradually inched higher as options traders re-priced the market after the breakout:
While most assets have implied volatility near multiyear lows, the utility sector is an outlier in that options prices are near the middle of the 2 year range.
Given the outperformance in the sector and the technical situation, I wanted to take a brief look at the largest stocks in the sector. The 5 largest components are DUK, NEE, D, SO, and EXC.
Those 5 components should be considered in two separate groups. NEE, D, and SO are the three growth stocks, where EPS is 40-100% higher over the past 10 years, and the stocks’ valuation on a Price/Book basis is between 1.75 and 3.50. On the other end are DUK and EXC, which are the cigar butts of the group. EXC annual EPS has actually contracted over the past 10 years (and has been very volatile in the process), while DUK EPS is up about 20% in the past decade. EXC and DUK both have a P/B ratio in the 1.2 to 1.3 range.
Some of the relative strength or weakness among the utilities can be attributed to geographic disparity. NEE is based in Florida, a major growth market, and has benefitted from a higher growth in demand than utilities in other areas. SO is headquartered in Georgia, and Dominion is in Virginia and North Carolina. All 4 of those states have had above average population growth over the past 5 years (see the list of population growth by state). Meanwhile, Excelon operates primarily in Illinois and Pennsylvania, where the population has hardly grown. Duke is based in North Carolina as well, though its operations are more diversified.
In terms of management prowess, NEE looks like the standout of the group, as EPS has grown in each year since 2005. Moreover, the company is making a strong push in wind and solar power plants in the U.S. Though the renewables segments are still a small part of the overall business, the long-term prospects look encouraging.
However, valuation for the growth stocks, NEE, D, and SO, is significantly higher than EXC and DUK, and also quite a bit higher than the historical valuation of NEE, D, and SO. That is of course an indication of the conducive market backdrop over the past few years, and the search for yield that has led so many investors to the utilities sector.
At this juncture, I’d still rather buy the consistent performers, like NEE and SO, and possibly hedge some of the risk of a breakdown in the utilities sector as a whole with farther dated XLU puts.
Recommended for You
(Reuters) - Struggling retailer Sears Holdings Corp will lay off at least 5,457 employees and close over 100 stores, many before Christmas, according to a Seeking Alpha report citing liquidation notices and employees. Sears shares rose 4.6 percent to $36 in premarket trading. At least 46 Kmart…Reuters
With 23 states now allowing some form of medical marijuana program, the industry is in need of workers. But because marijuana has been illegal for decades (and still is illegal federally) there can be a lack of qualified workers to support the field. The industry is trying to change that.Yahoo Finance
MOSCOW (AP) — The driver of the snowplow that apparently caused the plane carrying the Total CEO to crash at a Moscow airport says he neither saw nor heard the private jet as it sped toward him down the runway in the dark.Associated Press
Large manufacturers are increasingly moving production back to the United States from China, according to a new report by The Boston Consulting Group released Thursday. In the third annual survey of US-based senior executives at manufacturing companies with annual sales of at least $1 billion, the…AFP
There are 2,325 billionaires on the earth. And...Business Insider
When changing jobs, workers often roll funds in former 401(k) plans into IRAs, but there are at least 4 scenarios where doing so could be a mistake.CNBC
Facebook is blocked in China, but its co-founder Mark Zuckerberg appears determined to win over hearts and minds in Beijing -- surprising a hall full of students by conducting a Q&A session in Mandarin. Zuckerberg charmed his audience comprising Chinese and international students when he kicked off…AFP
Oct. 23 (Bloomberg) -- The saturated smartphone market hasn't turned off one British startup from trying to get in on the action. Kazam, founded by two former HTC executives, is hoping to make its mark with a super-skinny handset. CEO Michael Coombes tells Bloomberg what's unique about the Tornado…Bloomberg
Brian Shannon of Alpha Trends says the market roller coaster may not be over yet. The 200-day moving average on the S&P 500 may hold the answer to what's next.Yahoo Finance
Practical and fun uses for your mini-windfall.MarketWatch
One of Boeing's dreariest performers continues to be its highest-tech, most fuel-efficient airplaneBusinessWeek
London (AFP) - World oil prices hit reverse Wednesday following news of surging stockpiles in top consumer the United States, with additional selling pressure from the stronger dollar.AFP
Oct. 21 (Bloomberg) -- Billionaire Carl Icahn comments on market volatility and corporate governance. He speaks with Bloomberg's Stephanie Ruhle at the Robin Hood Investors Conference. (Source: Bloomberg)Bloomberg
I remember the day well. It was a bitterly...Business Insider
Apple's "groundbreaking" partnership with IBM...Business Insider
For the most part, the political debate over President Barack Obama's health-care overhaul has become a duel between vague slogans: Republicans say they want to "replace" the Affordable Care Act but generally don't say with what. So Democratic Senators Mark Warner and Mark Begich deserve credit for…Bloomberg
Shares of 3D printer maker 3D Systems were down...Business Insider
This week, former US Federal Reserve chief Ben...Business Insider
NEW DELHI (AP) — After months of criticism for not moving aggressively enough on promises of an economic overhaul, India's new prime minister has announced a string of policies designed to kick-start Asia's third-largest economy.Associated Press