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5 Utility Stocks to Protect Portfolio in a Capricious Market

Nalak Das

Wall Street lost a good chunk of value in May that it gained in the first four months of 2019 after facing a devastating fourth quarter of 2018. The reason for the stock market mayhem in the last seven trading days is nothing but the U.S-China trade conflict, which suddenly escalated this month.

Meanwhile, the fundamentals of the U.S. economy remain firm. First-quarter GDP registered record growth buoyed by solid consumer and business spending. The labor market is robust with record-low unemployment. And inflation is well under control despite wage hike.

However, market participants seem clueless about the direction in which the market will go even in the near term. At this juncture, it is important to take precautionary steps to safeguard one’s portfolio. Utilities are a safe bet during times of market turmoil, as they are relatively stable due to the essential nature of the products they offer. Consequently, it will be prudent to invest in utility stocks with a favorable Zacks Rank to stay safe. 

Wall Street Collapses

On May 13, the blue-chip Dow 30 Index plunged 617.38 points or 2.4%. The market benchmark S&P 500 Index also plummeted 2.4%. Both the Dow and S&P 500 posted their worst-ever, single-day loss since Jan 3. Furthermore, the tech-laden Nasdaq Composite tumbled 3.4%, its biggest single-day drop so far this year.

Notably, in the week ended May 10, the Dow, S&P 500 and Nasdaq Composite shed 2.1%, 2.2% and 3%, respectively, due to intensifying trade war between the two largest trading countries of the world.

Uncertainty Looms Large    

Markets are uncertain about when the U.S.-China trade tension will be resolved or if at all it will be. President Trump added to the prevailing ambiguity on May 13, when he said that people will come to know whether a trade deal is at all possible in next three to four weeks.

If negotiations continue, there is no timeline specified on when the parties should reach an agreement. However, an agreement will certainly bode well for both economies. On the other hand, if no progress made at all and a full- fledged trade war rages, then in addition of these two countries, the global economy will also see a slowdown.

Utilities are Immune to Vagaries of Economic Cycle   

The Utilities sector is mature and fundamentally strong as demand for such services is generally immune to vagaries of the economic cycle. It's because these companies provide basic services like electricity, gas and water, which can never go out of demand.

Consequently, adding stocks from the utility basket usually lends more stability to a portfolio in an uncertain market. Moreover, the sector is known for stability and visibility of its earnings and cash flows. Stable earnings enable utilities to pay out consistent dividends, making them more attractive to income-oriented investors.

Utility companies enjoy a reputation for safety given the regulated nature of their business, which lend their revenues a high level of certainty. These companies also benefit from the domestic orientation of their business, which shields them from foreign currency translation issues that have been plaguing the other industries of late.

Despite the stock market rout, S&P 500’s Utilities Select Sector SPDR (XLU) gained more than 1% and was the only sector out of 11 to remain positive. In the last one month as well, XLU has gained more than 0.6% just behind 1% gain for Consumer Staples Select Sector SPDR (XLP). The remaining 10 sectors finished in the red.

Our Top Picks

Stock markets are likely to remain volatile in near future due to trade concerns, geopolitical conflicts and global economic activities. Consequently, investment in defensive sectors such as utilities should be fruitful. We have narrowed down our search on five utility stocks with either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and strong growth potential.

The chart below shows price performance of our five picks in the last three months.

Middlesex Water Co. MSEX is engaged in treatment, store and distribution of water for residential, commercial, industrial and fire prevention purposes in the United States. It sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here. The company has expected earnings growth of 10.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.9% over the last 60 days.

SJW Group SJW is a public utility in the business of providing water service to a population of approximately 928,000 in the United States. It flaunts a Zacks Rank #1. The company has expected earnings growth of 29.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 11.4% over the last 60 days.

Brookfield Renewable Partners L.P. BEP owns a portfolio of renewable power generating facilities primarily in North America and internationally. It carries a Zacks Rank #2. The company has expected earnings growth of 261.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 56.7% over the last 60 days.

ONEOK Inc. OKE engages in gathering, processing, storage, and transportation of natural gas in the United States. It carries a Zacks Rank #2. The company has expected earnings growth of 10.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.1% over the last 60 days.

Chesapeake Utilities Corp. CPK is a diversified energy company engaged in regulated and unregulated energy businesses. It has a Zacks Rank #2. The company has expected earnings growth of 10.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.3% over the last 60 days.

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Brookfield Renewable Partners L.P. (BEP) : Free Stock Analysis Report
 
Chesapeake Utilities Corporation (CPK) : Free Stock Analysis Report
 
ONEOK, Inc. (OKE) : Free Stock Analysis Report
 
SJW Group (SJW) : Free Stock Analysis Report
 
Middlesex Water Company (MSEX) : Free Stock Analysis Report
 
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