- 27 февраля 2017, 14:58
- Zacks Investment Research
As the broader markets are headed toward the longest stretch of gains, investors raise doubts over the catalyst behind the surge. They are not sure about how effectively any of President Donald Trump’s pro-growth policies like tax cuts, deregulation and infrastructure outlays will materialize or whether the net effect of such policies will stand in good stead.
The stock market, moreover, has been on a tear since the presidential election which has left many wondering about whether the market is overheated. Several analysts have also cautioned about stretched valuations. Such uncertainty has made investing in safer bets like utilities a lucrative option. Utility stocks are already gaining traction, with such companies posting encouraging weekly gains.
Stocks Extend Gains
The Dow extended its record-setting streak on Feb 24. The blue-chip index posted its eleventh straight session of record closes for the first time since 1987. The Dow saw the third straight weekly gain, while both the S&P 500 and the Nasdaq ended in the green for the fifth consecutive week.
U.S. stocks, in fact, have scaled record highs since the Election Day as investors expect Trump’s policies on taxes, regulation and infrastructural spending will accelerate growth and boost corporate earnings. Trump plans to overhaul tax codes for business and individuals over the next two to three weeks. He also intends to implement a multi-trillion-dollar tax cut that will boost the U.S. economy and lift corporate profits.
Trump also signed an executive order designed to scale back the Dodd-Frank Act. Trump views the Dodd-Frank regulatory overhaul as a harsh measure on banks as they had to beef up compliance compartments to deal with a list of new rules, while he also keeps talking about how he wants to reconstruct America’s roads, bridges and other infrastructure. This led his administration to unveil a proposal to spend $1 trillion over the next 10 years (read more: Top Stock Picks for Trumps Trillion Dollar Infrastructure Plan).
Doubts Cast Over Trump-Inspired Rally
However, concerns are growing over the administration’s ability to deliver on such plans. Apprehensions are rife that tax cuts may come in later than many have expected. U.S. Treasury Secretary Steven Mnuchin had said that the Trump tax plan should be in place by August, suggesting much work was still required on the major elements of the sweeping tax reform plan.
Trump vowed to repeal “Obamacare”, although he recently pushed back the timeline for doing so. Such business-friendly reforms are more likely to be slower than expected as Trump’s team will be working on only one thing at a time.
The big jump in stocks, in the meantime, had come at a time when investors see markets as overpriced. Analysts at The Goldman Sachs Group, Inc. GS warned that “we are approaching the point of maximum optimism and the S&P 500 will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tailwind to corporate earnings than originally expected”. They noted that while markets are rising steadily, expectations for S&P 500 earnings have been declining.
The concern was quite apparent when U.S. indices fell modestly all through the session on Feb 24, before a buying spree in the last half hour of trading drove shares. Lest we forget, the Trump-induced rally hasn’t factored in less business-friendly campaign rhetoric such as tearing up NAFTA, breaking up banks and even criticizing the Federal Reserve.
Utilities Post Solid Weekly Performance
Even though the stock market has been on a tear of late, investors are maintaining a bearish stance as they question the longevity of the Trump-induced rally. The utility sector, which is less sensitive to gyrations in the broader market and viewed typically as a defensive trade, moved north. Owing to a stable income base, utility companies have the means to pay steady return to shareholders with minimal price volatility and moderate risk.
Utility companies registered their best weekly performance on Feb 24 since July as investors poured more into dividend-paying stocks. The Utility Select Sector SPDR XLE gained 4.1% last week, the highest among the S&P 500 sectors.
5 Best Choices
As the markets are approaching the point of “maximum optimism”, investors are latching on to relatively safe utility stocks. Such high yield stocks are more in demand after rise in bond prices dragged their yields down. The yield on the 10-year Treasury note slipped to 2.317% on Feb 24, its lowest since late Nov 2016.
We have, thus, selected five solid utility stocks that you should bet on amid this backdrop. These stocks boast a Zacks Rank #1 (Strong Buy) or 2 (Buy) and are well poised to grow in the near term. Such stocks also flaunt a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Atlantica Yield PLC ABY owns, manages and acquires a diversified portfolio of contracted assets in the power and environment sectors. The company has a Zacks Rank #2 and a VGM Score of ‘B’. Atlantica Yield’s estimated growth rate for this year is 766.7%, way higher than the industry’s gain of 5.4%. The Zacks Consensus Estimate for its current year earnings increased 5.4% over the last 30 days. Atlantica Yield has a dividend yield of 2.98%.
Ameren Corp AEE is a public utility holding company. The company has a Zacks Rank #2 and a VGM Score of ‘B’. Ameren’s estimated growth rate for this year is 3.5% in contrast to the industry’s projected decline of 4.9%. The Zacks Consensus Estimate for its current year earnings advanced 0.1% over the last 30 days. Ameren has a dividend yield of 3.22%.
Spark Energy Inc SPKE operates as an independent retail energy services company in the U.S. It operates through two segments, Retail Natural Gas and Retail Electricity. Spark Energy sports a Zacks Rank #1 and a VGM Score of ‘A’. The company’s estimated growth rate for this year is 25.5%, higher than the industry’s gain of 5.4%. The Zacks Consensus Estimate for its current year earnings rose 6.6% over the last 90 days. Spark Energy has a dividend yield of 5.32%. You can see the complete list of today’s Zacks #1 Rank stocks here.
UGI Corporation UGI distributes, stores, transports and markets energy products, and related services in the U.S. The company has a Zacks Rank #2 and a VGM Score of ‘A’. UGI’s estimated growth rate for this year is 21.5%, more than the industry’s gain of 3.1%. The Zacks Consensus Estimate for its current year earnings improved 4.6% over the last 30 days. UGI has a dividend yield of 1.97%.
Xcel Energy Inc. XEL engages primarily in the generation, purchase, transmission, distribution and sale of electricity in the U.S. The company has a Zacks Rank #2 and a VGM Score of ‘B’. Xcel Energy’s estimated growth rate for this year is 4.8% in contrast to the industry’s loss of 4.9%. The Zacks Consensus Estimate for its current year earnings increased 0.4% over the last 30 days. Xcel Energy has a dividend yield of 3.14%.
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Ameren Corporation (AEE): Free Stock Analysis Report
Xcel Energy Inc. (XEL): Free Stock Analysis Report
Atlantica Yield PLC (ABY): Free Stock Analysis Report
UGI Corporation (UGI): Free Stock Analysis Report
Goldman Sachs Group, Inc. (The) (GS): Free Stock Analysis Report
Spark Energy, Inc. (SPKE): Free Stock Analysis Report
SPDR-EGY SELS (XLE): ETF Research Reports
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