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Top 5 Picks to Boost Portfolio Amid Wall Street's Free Fall

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The free fall of U.S. stock markets since the beginning of this year has been showing no sign of abatement. Barring a short rally in the second half of March, the bearish trend continues. After a ruthless April, the meltdown persisted in the first week of May.

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 — Ameren Corp. (AEE - Free Report) , Southwest Gas Holdings Inc. (SWX - Free Report) , Vistra Corp. (VST - Free Report) , Essential Utilities Inc. (WTRG - Free Report) , and National Fuel Gas Co. (NFG - Free Report) .

Wall Street Melts

On May 4, the Fed hiked the benchmark interest rate by 50 basis points effective immediately. Notably, the Fed raised the lending rate by 25 basis points in its March FOMC, for the first time in more than three years. With this decision, the Fed fund rate has increased to 0.75-1%.

Moreover, the central bank decided to shrink the size of its $9 trillion balance sheet in a phased manner effective Jun 1. Initially, the central bank will roll off $30 billion of Treasury Notes and $17.5 billion in mortgage-backed securities per month. After three months, the size of the Treasury Note will increase to $60 billion and mortgage-backed securities will increase to $35 billion per month.

Fed Chairman Jerome Powell hinted that a 50-basis-point rate hike is likely in the next two FOMC meetings. At present, the CME FedWatch data indicates that the Fed funds rate will reach 2.75-3% by the end of 2022. On May 6, the yield on the benchmark 10-Year U.S. Treasury Note touched 3.13%, its highest since 2018.

Market participants are concerned that if these measures fail to contain inflation, Fed will be compelled to raise the interest rate by 75 basis points. The global supply-chain system is showing no signs of restoration. The lingering war between Russia and Ukraine and the resurgence of COVID-19 infections in China significantly delayed the process.

Year to date, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — have declined 9.5%, 13.5% and 22.4%, respectively. The Nasdaq Composite is in bear territory while both the Dow and the S&P 500 are in the correction zone.

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. Of the 11 broad sectors of the S&P 500, except energy, utility is the only sector which is currently in green year to date.

Our Top Picks

We have narrowed our search to five utility stocks with strong potential for 2022. These stocks have seen good earnings estimate revisions in the last 30 days. Moreover, these are low-beta (beta >0 but <1) and high-yielding stocks. Each of our picks carries either a Zacks Rank #1 (Strong Buy) 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 in the past three months.

Zacks Investment Research
Image Source: Zacks Investment Research

Ameren has projected solid infrastructure investments of more than $45 billion in the 2022-2031 period. AEE’s growth has been led by its consistent investments and the company expects to spend up to $17.3 billion to support system reliability and infrastructural upgrades in the 2022-2026 period. Ameren has targeted to expand its renewables portfolio by adding 2,400 megawatts of renewable generation by the end of 2030.

Zacks Rank #2 Ameren has an expected earnings growth rate of 6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the last 30 days. AEE has a current dividend yield of 2.55% and a beta of 0.34.

Southwest Gas has a strategic investment plan in place to strengthen its infrastructure. SWX is making acquisitions to expand its operations and service territories, which are likely to be accretive to earnings per share. Southwest Gas will also continue gaining from customer addition to its natural gas segment and enhancing its shareholder value via dividend hikes since 2007. SWX will split Centuri and become a fully regulated natural gas business.

Zacks Rank #2 Southwest Gas has an expected earnings growth rate of 11% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.4% over the last 30 days. SWX has a current dividend yield of 2.71% and a beta of 0.11.

Vistra operates as an integrated retail electricity and power generation company. VST operates through six segments: Retail, Texas, East, West, Sunset, and Asset Closure. Vistra 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 1% over the last 7 days. VST has a current dividend yield of 2.55% and a beta of 0.82.

Essential Utilities continues to benefit from acquisitions and organic means, including adding new customers and expanding the area of operation. The planned investment of $3 billion through 2024 will expand and strengthen iWTRG’s water and natural gas infrastructure in the United States.

Debt management is helping Essential Utilities lower the weighted average cost of fixed-rate long-term debt. The consistent performance allows WTRG to continue with shareholder-friendly moves. It has enough liquidity to meet its near-term debt obligations.

Zacks Rank #2 Essential Utilities has an expected earnings growth rate of 6.6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last 30 days. WTRG has a current dividend yield of 2.40% and a beta of 0.70.

National Fuel Gas’ acquisition of Royal Dutch Shell’s upstream and midstream assets aided it to expand operations in the Appalachian region. Proper cost management will reduce  NFG’s expenses and boost margins over the long term.

Completion of long-term capital projects will help National Fuel Gas to upgrade transmission pipelines and assist the company in cutting emissions from utility operations. A stable cash flow allows NFG to pay regular dividends and its strong liquidity will allow the company to meet near-term debt obligations.

Zacks Rank #1 National Fuel Gas has an expected earnings growth rate of 41.5% for the current year (ending September 2022). The Zacks Consensus Estimate for current-year earnings has improved 7.4% over the last 30 days. NFG has a current dividend yield of 2.60% and a beta of 0.64.