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Selective September: Targeted Strength in This Industry Leader

·4 min read

The stock market has a way of reeling investors in, only to spit them back out in unceremonious fashion. The summer rally that began in mid-June has lost steam, with stocks threatening a trip back down to the lows of the year. Just when the major indices appeared to have picked up some momentum, the rally stalled and it’s been nearly a straight shot down the past few weeks. The market shall giveth, and the market shall taketh.

As we head into the dreaded and historically weak month of September, investors are wondering if more pain lies ahead. Selective buying has been the name of the game all year, as most companies have witnessed their share price drop substantially. The price action in the stock market has been fast and furious, with sector rotation has been on full display.

One sector that has held up extraordinarily well is utilities. This defensive space tends to outperform during major corrections and bear markets, and it has certainly been the case this year. The Zacks Utilities sector is up nearly 3% on the year, while the S&P 500 has fallen more than 16% year-to-date.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Apart from energy, the utilities sector is leading the pack this year and recently broke out to new all-time highs earlier this month. New highs are a sign of strength; many utilities have completed large bases and are climbing into new ground on above-average volume, which serves as another sign that this safeguarding move may have more room to run.

The Utilities Sector SPDR ETF XLU is showing resilience recently and is up nearly 13% in the past year. XLU has outperformed over the past month and is showing no signs of a peak in the movement. Also note the steady long-term performance for the Utilities Select SPDR ETF:


Image Source: StockCharts

While the recent performance is a positive for XLU, it’s important to note that defensive sectors leading could potentially be a warning sign. Most investors are expecting the growth names that have been beat up to rebound later this year, but as we know the crowd is usually wrong. Trends can persist for much longer than most investors would expect. Prior non-recessionary periods in which the S&P 500 experienced negative returns have tended to coincide with defensive sector outperformance.

Let’s dive deeper into a utility company that is ranked favorably by our Zacks Rank and is outperforming the market.

Consolidated Water Co. Ltd. (CWCO)

Consolidated Water Company designs, constructs, manages, and operates water production and water treatment plants in the Bahamas, Cayman Islands, and the United States. CWCO uses reverse osmosis technology to produce potable water from seawater.

The company supplies water to residential, commercial, and government customers. It also provides design, engineering, construction, and procurement services relating to municipal water distribution and treatment. A Zacks Rank #2 (Buy) stock, Consolidated Water is part of the Zacks Utility – Water Supply industry, which currently ranks in the top 36% out of approximately 250 industries.

CWCO has strung together a notable history of earnings beats, exceeding estimates in each of the past four quarters. The company has delivered an average beat of +35.91% over this timeframe. CWCO most recently reported Q2 EPS of $0.18/share back in June, a +12.5% surprise over consensus estimates. After a slowdown when the pandemic hit back in 2020, growth has resumed and is expected to pick up this year.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Analysts have raised earnings estimates across the board. The full-year EPS estimate has climbed 8.96% in the past 30 days. The 2022 Zacks Consensus Estimate now stands at $0.73/share, reflecting astounding growth of 217.39% relative to last year.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

And the stock price has reflected this growth, as shares have advanced more than 56% this year – all while the market continues to hover in a deep correction.


Image Source: StockCharts

Make sure to keep an eye on this water utility leader that is outperforming the market.

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Utilities Select Sector SPDR ETF (XLU): ETF Research Reports
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