The Utilities sector was the best performer for the S&P 500 in 2018. Although Wall Street has been recovering impressively so far in 2019, several headwinds still persist. On Feb 25, the Fed Chairman Jerome Powell said in its Congressional testimony that although the U.S. economy is in good shape now, it may face headwinds due to slowdown in China, Japan and European Union.
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.
Eurozone’s Growth at Risk
On Feb 21, Data firm IHS Markit reported that Eurozone’s Manufacturing Purchasing Managers Index (PMI) declined to a reading of 49.2 in February, its lowest reading in 69-months. Any reading below 50 indicates contraction of manufacturing activities.
On Feb 6, the European Commission lowered 2019 growth projection for the 19-member Eurozone from 1.9% in November to 1.3%. The growth rate for 2020 was pegged at 1.6%.On Feb 4, Bank of England reduced growth rate of the U.K. for 2019 to 1.2% from 1.7% forecasted earlier. Economic forecast for 2020 has been reduced to 1.5%. The root cause of an impending slowdown is the Brexit related problem.
Japan’s Manufacturing Declining
On Feb 21, Bloomberg reported that the Flash Markit/Nikkei Japan Manufacturing PMI fell to a seasonally adjusted 48.5 in February from 50.3 in January, its lowest reading since June 2016. On Feb 20, Japan stated that its trade deficit for the month of January increased a whopping 49.2% year over year to 1.41 trillion yen. The stiff increase in trade deficit was owing to a decline of 17.4% of exports to China, its largest decline since January 2016. This was the second consecutive month of export decline.
Slowdown in Chinese Growth
Chinese economy expanded at 6.6% in 2018, its slowest pace since 1990. The China Association of Automobile Manufacturers reported that deliveries of passenger vehicles to dealers dropped 4.1% to 23.7 million units, its first decline in 28 years. Moreover, the China Passenger Car Association reported a slump of 6% in retail vehicle sales in 2018. China is providing several stimuli to accelerate its economic growth.
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 condition. Moreover, the sector is known for stability and visibility of its earnings and cash flows. Stable earnings enable utilities to pay out consistent dividends that add to their attractiveness 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.
Our Top Picks
Utility service providers will benefit from the new rates in their service territories, customer growth, effective management and control of expenses through the introduction of new technology. Consequently, we have narrowed down our search to five utility stocks with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
NRG Energy Inc. NRG operates as an integrated power company in the United States. The company has expected earnings growth of 101.1% for current year. The Zacks Consensus Estimate for the current year has improved by 8.1% over the last 60 days.
Northwest Natural Holding Co. NWN builds and maintains natural gas distribution systems in the United States. The company has expected earnings growth of 11% for current year. The Zacks Consensus Estimate for the current year has improved by 0.4% over the last 60 days.
NextEra Energy Inc. NEE generates, transmits, distributes, and sells electric power to retail and wholesale customers in North America. The company has expected earnings growth of 9% for current year. The Zacks Consensus Estimate for the current year has improved by 0.4% over the last 60 days.
Spark Energy Inc. SPKE operates as an independent retail energy services company in the United States. The company has expected earnings growth of 104.6% for current year. The Zacks Consensus Estimate for the current year has improved by 10% over the last 60 days.
American Water Works Co. Inc. AWK provides water and wastewater services in the United States and Canada. The company has expected earnings growth of 8.5% for current year. The Zacks Consensus Estimate for the current year has improved by 1.4% over the last 60 days.
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