Back to top

Image: Bigstock

5 Defensive Stocks Pick to Buy on Last Week's Plunge in Wall Steet

Read MoreHide Full Article

Last week, Wall Street suffered a huge blow as major indexes suffered the sharpest decline since the beginning of the pandemic in March 2020. The Fed will conduct its FOMC meeting this week under the scenario of skyrocketing inflation. Market participants are highly concerned that the central bank may adopt harsh measurers beyond the market’s expectation. This shook investors’ confidence.

At this juncture, it will be prudent to stay invested with defensive stocks from utilities as these are less volatile in market’s downtrend. Five such stocks with a favorable Zacks Rank are Xcel Energy Inc. (XEL - Free Report) , WEC Energy Group Inc. (WEC - Free Report) , Atmos Energy Corp. (ATO - Free Report) , MGE Energy Inc. (MGEE - Free Report) and Eversource Energy (ES - Free Report) .

Wall Street Tumbles

U.S. stock markets routed last week with the Fed raising the tapering of the quantitative easing program and Chairman Jerome Powell’s indication that the central bank will not hesitate to take harsh measures to contain inflation. Several economists and financial experts have said that markets have already discounted four rate hikes this year of 25 basis points each.

However, many market participants have expressed fear that the Fed may raise the benchmark interest rate by 50 basis points that too as early as in March. Notably, the central bank had reduced market’s interest rate to as low as 0-0.25% in March 2020, at the onset of the outbreak of coronavirus. The Fed has maintained that rate to date.

As market participants are expecting a higher interest rate regime in the near future, the yield on government bond has soared. Last week, the yield on the benchmark 10-Year U.S. Treasury Note jumped its two-year high of 1.9%. The yield on the short-term 2-Year U.S. Treasury  Note, which is most sensitive to Fed rate hike, climbed more than 1%, for the first time in two years. The yield on the long-term 30-Year U.S. Treasury  Note also surged to 2.2%.

Higher market risk-free returns mean a higher discount rate for future cash flows from stock investing. This affects growth-oriented stocks — especially the technology and consumer discretionary stocks — as these generally provide higher returns over the long term. Moreover, these companies depend on easy access to cheap credit to expand their businesses.

Consequently, the Dow tumbled 5.6% in the last six trading days, the S&P 500 nosedived 5.7% in the last four trading days and the teach-heavy Nasdaq Composite plunged 7.6% in the last four trading sessions. The Nasdaq Composite is currently in correction territory plummeting 14.9% from its all-time high recorded on Nov 22, 2021.

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 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 that are lately plaguing the other industries.

Our Top Picks

We have narrowed our search to five utility stocks with positive growth potential for 2022. These stocks have seen good earnings estimate revisions in the last 30 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our five picks in the past year.

Zacks Investment ResearchImage Source: Zacks Investment Research

Xcel Energy is well poised to benefit from its long-term investment and renewable power generation. XEL’s expanding electric and natural gas customer base along with the enforcement of new rates act as its key tailwinds. Xcel Energy has plans to become carbon neutral by 2050. XEL has been paying dividends on a regular basis, thus enhancing its shareholder value. Also, it has sufficient liquidity to meet its near-term obligations.

Xcel Energy has an expected earnings growth rate of 7.2% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.3% over the last 7 days. XEL has a current dividend yield of 2.68%.

WEC Energy continues to add electric and natural gas customers, which are expected to boost demand for its services. WEC targets a 17.7-billion investment in the 2022-2026 period to strengthen its infrastructure and add renewable assets to its portfolio. The ongoing investment is increasing the efficiency of operations and allowing the company to provide reliable services.

WEC Energy is also focused on becoming net carbon neutral by 2050 from the 2005 levels and spending on cost-effective low-emission generation projects. Also, WEC continues to boost its shareholder value through dividend hikes.

WEC Energy has an expected earnings growth rate of 5.2% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.2% over the last 30 days. WEC has a current dividend yield of 2.79%.

Atmos Energy continues to benefit from the rising demand from its expanding customer base.  ATO is planning to invest in the range of $13-$16 billion in the fiscal 2022-2026 time period to increase the reliability of its pipelines and serve customers efficiently. Returns within a year of capital investment continue to boost Atmos Energy’s performance and allow it to pay regular dividends. ATO has enough liquidity to meet near-term debt obligations.

Atmos Energy has an expected earnings growth rate of 7.2% for the current year (ended September 2022). The Zacks Consensus Estimate for current-year earnings improved 0.2% over the last 7 days. ATO has a current dividend yield of 2.60%.

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.

MGE Energy has an expected earnings growth rate of 3% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.7% over the last 30 days. MGEE has a current dividend yield of 2.02%.

Eversource Energy is making systematic capital investments to add more clean assets to its generation portfolio and expand transmission and distribution networks. Infrastructure upgrades will assist ES to lower emissions as well as efficiently serve its strong customer base.

The acquisition of gas assets from NiSource and the joint venture with Ørsted will fortify Eversource Energy’s operations. ES has enough liquidity to meet its debt obligations.

Eversource Energy has an expected earnings growth rate of 6.9% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.2% over the last 7 days. ES has a current dividend yield of 2.77%.