With multiple domestic and geopolitical flashpoints raging, it’s no secret that the markets have had trouble generating traction. In fact, according to CNBC, the only S&P 500 sector to ring positive on a 52-week intraday high basis are utility stocks.
So why the sudden interest in this typically under-the-radar segment? Primarily, investors are worried about declining economic conditions. They cite a flattening of the yield curve, or the narrowing of long and short-term interest rates. Such a dynamic implies declining growth opportunities. In addition, banks are disincentivized to lend money in this environment.
Naturally, this uncertainty makes cyclical companies unattractive for those seeking shelter. On the other hand, utilities represent some of the best stocks to invest in at this juncture. Market performance undeniably proves this. Since the beginning of March, the benchmark Utilities Select Sector SPDR Fund (NYSE:XLU) has gained over 17% in a largely consistent trend channel.
Another factor that has lifted utility stocks is bad weather. As our own Will Healy reported, we’ve experienced an early start to cold spells. Further, weather forecasts call for a colder-than-average winter. This has skyrocketed natural-gas prices, but no matter what, people must crank up the heat. It’s cynical but this bodes well for utilities.
Finally, the Federal Reserve doesn’t intend to jump benchmark interest rates as quickly as analysts previously feared. Therefore, dividend-paying utilities have suddenly become everyone’s best stocks to invest in.
In short, the only certainty we have is uncertainty. This provides ample fuel for the following four utility stocks:
Duke Energy (DUK)
Duke Energy (NYSE:DUK) has consistently proven itself as one of the best stocks to invest in during difficult phases. Year-to-date, DUK stock has gained nearly 12%. Better yet, after the January fallout, shares have jumped over 20%.
While steadily rising throughout most of the year, DUK stock found substantial traction in October and November. As Wall Street sought shelter in secular, defensive names, utility stocks offered a natural place to steadily grow your money. An attractive 4.1% dividend yield has ensured that DUK stock receives attention from weary investors.
Another factor that is boosting Duke’s profile is its forward-thinking management team. Recently, the company made local headlines when it announced a hybrid conversion for one of its coal plants. Essentially, the organization can choose to deliver electricity via coal or natural gas.
Such a move is a PR boon for DUK stock, and it is keeping the organization competitive in the longer term.
Sempra Energy (SRE)
Source: Riccardo Annandale Via Unsplash
As the broader markets unraveled, many folks immediately sought shelter in defensive names. So while utilities are among the best stocks to invest in, they’re not exactly a secret. Therefore, most top companies have soared through the roof.
If you’re looking for a strong player that hasn’t gone completely berserk, take a look at Sempra Energy (NYSE:SRE). SRE stock isn’t necessarily a slouch in the capital-gains department, as it’s up double-digits this year. But since the second half, shares have largely flatlined.
Longer-term, I think this is an enticing opportunity for SRE stock. The company levers key operations in the lucrative Southern California market, as well as Arizona and Texas. In addition, Sempra Energy is spreading its presence eastward, planting facilities in the Midwest and near the east coast.
It’s also one of the few utility stocks that has international exposure. Sempra is aggressively moving into Central and South America, providing investors with comprehensive coverage.
Source: Erik Drost via Flickr
Most utility stocks have proven their defensive cred, but few can match FirstEnergy’s (NYSE:FE) pace. On a YTD basis, FE stock has gained nearly 31%. But despite its scorching performance in the markets, the company still offers a robust 3.9% dividend yield.
That said, FirstEnergy is a speculative play in the utilities sector. The company doesn’t have the greatest strength in the balance sheet, with a significant headwind being its high cash-to-debt ratio. Also, its three-year revenue growth rate has gone negative. Notably, its subsidiary, FirstEnergy Solutions, has filed for Chapter 11 bankruptcy, although the parent is not involved in those proceedings.
Still, FE stock offers longer-term viability. FirstEnergy is undergoing a transition to become a fully regulated utility company. This entails cost-cutting measures that should significantly improve profitability over the next few years. Plus, Zacks Equity Research recently pegged FE stock as one of the best stocks to invest in from a value perspective.
Logically, colder weather benefits utility stocks as people typically prefer higher bills over constantly shivering inside their homes. Along with that demand comes higher prices for energy-related commodities.
Overall, the current winter season has benefited sector players like Entergy (NYSE:ETR). However, the energy market’s volatility makes it difficult to plan and profit from selling energy resources. While ETR stock benefits today, tomorrow could bring a completely different result.
Therefore, Entergy’s management made the critical decision to sell off its New York and Michigan-based nuclear power plants. Essentially, this move will convert ETR stock into a fully regulated utility investment. In the long run, we should see increased stability and return on investment for shareholders.
In the meantime, FE stock offers a 4.1% dividend yield, which should do wonders in this tricky market environment.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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