The free fall of U.S. stock markets since the beginning of this year has intensified recently. Several measures of inflation are rising despite an interest rate hike by the Fed and tighter monetary control. The prolonged war between Russia and Ukraine and China’s strict COVID-19 restrictions have destroyed any hope of recovering the global supply-chain system.
At this juncture, it will be prudent to stay invested in defensive stocks from the utilities space as these are less volatile in a market downturn. Five such stocks with a favorable Zacks Rank are MGE Energy Inc. MGEE, Vistra Corp. VST, Global Water Resources Inc. GWRS, Unitil Corp. UTL and Consolidated Water Co. Ltd. CWCO.
Wall Street Turmoil as Inflation Creeps Up
On Jun 10, the Department of Labor reported that the consumer price index (CPI) – popularly known as household inflation – rose 1% in May compared with 0.3% in April. The consensus estimate was 0.7%. The core CPI (excluding volatile food and energy items) was up 0.6% in May in line with the previous month. The consensus estimate was 0.5%.
Year over year, CPI jumped 8.6% in May compared with 8.3% in April. May’s reading was the highest since December 1981. The core CPI climbed 6% year over year in May, exceeding the consensus estimate of 5.9%. However, April’s reading was 6.2%.
Following the news, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — have plummeted 2.7%, 2.9% and 3.5%, respectively. The Nasdaq Composite is under bear market since March plunging 27.5% year to date. Both the S&P 500 and the Dow are in the correction zone, tumbling 13.6% and 18.2%, respectively, year to date.
Utilities Immune to the Vagaries of Economic Cycle
The Utilities sector is mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. It's because these companies provide basic services like electricity, gas, water and telecommunications, 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 the stability and visibility of its earnings and cash flows. Stable earnings enable utilities to pay out consistent dividends that make them more attractive to income-oriented investors.
Utility companies enjoy a reputation for being safe 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.
Moreover, utility stocks are generally low-beta stocks (beta >0 but <1). At this stage, investment in low-beta stocks with a high dividend yield and a favorable Zacks Rank may be the best option. If the market’s northbound journey is reestablished, the favorable Zacks Rank of these stocks will capture the upside potential. However, if market’s downturn continues, low-beta stocks will minimize portfolio losses and dividend payment will act as a regular income stream.
Year to date, out of the 11 broad sectors of the S&P 500 Index, 10 are in negative territory, except the energy sector. Of these 10 sectors, utilities suffered the least. The utilities Select Sector SPDR (XLU) dropped marginally by 0.34%.
Our Top Picks
We have narrowed our search to five low-beta utility stocks with solid potential for the rest of 2022. These stocks have seen positive earnings estimate revisions within the last 60 days. Moreover, these companies are regular dividend payers. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
Vistra operates as an integrated retail electricity and power generation company. VST operates through six segments: Retail, Texas, East, West, Sunset, and Asset Closure. The company retails electricity and natural gas to residential, commercial, and industrial customers across 20 states in the United States and the District of Columbia.
Zacks Rank #1 Vistra has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 11.2% over the last 60 days. VST has a current dividend yield of 2.67% and a beta of 0.82.
Global Water Resources is a water resource management company that owns, operates, and manages regulated water, wastewater, and recycled water utilities primarily in metropolitan Phoenix, AZ.
Zacks Rank #1 Global Water Resources has an expected earnings growth rate of 25% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 25% over the last 60 days. GWRS has a current dividend yield of 2.12% and a beta of 0.70.
MGE Energy operates as a public utility holding company primarily in Wisconsin. MGEE operates through five segments: Regulated Electric Utility Operations, Regulated Gas Utility Operations, Nonregulated Energy Operations, Transmission Investments, and All Other.
MGE Energy generates, purchases, and distributes electricity, owns or leases electric generation facilities and plans, constructs, operates, maintains, and expands transmission facilities to provide transmission services.
Zacks Rank #2 MGE Energy has an expected earnings growth rate of 7.2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1% over the last 60 days. MGEE has a current dividend yield of 1.96% and a beta of 0.66.
Consolidated Water currently utilizes the most advanced technology to convert sea water to potable water and meet the need of customers. CWCO’s strategy of expanding operations via acquisitions and organic ventures having a significant requirement for potable water is driving growth. The return of tourism to the Cayman Islands is expected to drive earnings. Consolidated Water has enough liquidity to meet its debt obligations.
Zacks Rank #2 CWCO has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 26.4% over the last 60 days. Consolidated Water has a current dividend yield of 2.34% and a beta of 0.21.
Unitil is engaged in the distribution of electricity and natural gas in the United States. UTL operates through three segments: Utility Gas Operations, Utility Electric Operations, and Non-Regulated.
Zacks Rank #2 UTL has an expected earnings growth rate of 8.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last 60 days. Unitil has a current dividend yield of 2.77% and a beta of 0.48.
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