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Will Utility Sector Survive Coronavirus Wrath? Stocks to Buy

Aparajita Dutta

The coronavirus pandemic has practically brought the world economy to its knees over the past few weeks. All sectors are showing signs of weakness, as increasing number of countries are being put into lockdowns, thereby stalling significant economic transactions. The Utility sector, which has always been a safe haven for U.S. investors, is also bearing the brunt.

Evidently, the sector has lost 29.5% year to date. In the coming weeks, the situation is going to be even worse for the utility companies, as shutdown of businesses and industries mean a slump in energy demand.  

COVID-19 Impact on Utilities & Drab Outlook

Utilities are among the 16 industries labeled as “critical infrastructure sectors” by the U.S. Department of Homeland Security, marking them for a heightened level of cooperation. However, it will be difficult for the power companies to keep up with providing essential services timely, as fears of workforce shortage are looming large, considering the rapid rate at which this pandemic is affecting people in the United States. And the harsh reality is that majority of the utility workforce cannot work from home.

To this end, the Edison Electric Institute (EEI), the nation’s biggest power industry association,in its report published last month, predicted that up to 40% of utility employees could be sick, quarantined or at home to care for sick family members as the pandemic spreads.

On the demand side, although North American utilities have not yet seen any drastic reduction in demand for power, they're likely to start seeing them soon, per a recent report from the Wood Mackenzie Power & Renewables and Energy Transition teams. Particularly, depressed demand from commercial and industrial consumers remains an obvious source of concern for U.S. electricity companies.

Rate Cut & Contingency Plan

The above discussion might discourage an investor planning to choose utility stocks for his or her portfolio. However, there remains a silver lining amid this cloud of huge uncertainty that has been created by COVID-19. Notably, the pandemic has forced the Federal Reserve to slash the nation’s interest rates by 50 points in its latest meet.

Now, the Utility sector tends to benefit when the rates are down, as it helps utilities to get funds from the market at a cheaper rate and continue with infrastructure strengthening initiatives.

Moreover, ever since the virus has started to spread in the United States, its utility providers have adopted significant contingency plans to offset the negative effects.

For instance, Edison International’s EIX subsidiary, Southern California Edison has already set up telework for about 8,000 of its 13,000 employees, while the remainders working in the field or in customer-facing jobs are taking steps to keep their distance from the public and disinfect facilities.

Per a report by Reuters, Consolidated Edison ED is taking steps to keep critical employees healthy, including separating some control center personnel to other locations, where they can perform their work.

Stocks to Buy

Amid the turmoil that the U.S. stock market is facing, the aforementioned contingency plans that the utilities are adopting should encourage investors to choose the following stocks, each of which carries a favorable Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Moreover, these stocks are still showing signs of growth and boast a track record of the same, making them even more attractive.

Duke Energy DUK surpassed the Zacks Consensus Estimate in the trailing four quarters with the average beat being6.53%. The estimate for this electric utility provider’s earnings indicates 2.8% annual improvement in 2020.

FirstEnergy FE surpassed the Zacks Consensus Estimate in the trailing four quarters with the average beat being5.47%. The consensus estimate for this diversified energy provider’s sales indicates 2.2% annual improvement in 2020.

WEC Energy WEC surpassed the Zacks Consensus Estimate in the trailing four quarters with the average beat being5.11%. The consensus estimate for this electricity provider’s earnings indicates 4.5% annual improvement in 2020.

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Edison International (EIX) : Free Stock Analysis Report
FirstEnergy Corporation (FE) : Free Stock Analysis Report
Consolidated Edison Inc (ED) : Free Stock Analysis Report
WEC Energy Group, Inc. (WEC) : Free Stock Analysis Report
Duke Energy Corporation (DUK) : Free Stock Analysis Report
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