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4 Stocks Value Investors Will Love in the Utility Sector
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U.S. utilities lagged the broader equity markets over the last several months. However, it’s expected that the two major headwinds responsible for the sectors’ underperformance will fizzle out in the long run.
Utilities have been affected by the rise in long-term interest rates. The Fed, however, after hiking rate this month, signaled at only two more hikes by the end of the year, bringing disappointment to traders who had pinned hopes on a more hawkish tone. Such a tempered outlook is a blessing in disguise for dividend payers like utilities.
Many observers also believed that the sector has some earnings risk, thanks to potential tax reforms under President Trump administration. However, Trump’s failure to repeal and replace Obamacare has cast doubts on the efficiency of his administration to deliver on the other pledges including tax cuts. Ironically, Trump is to reverse former President Barack Obama’s 2016 ban on new federal coal leases, which will in turn drive U.S. electricity production.
Despite the initial hiccup, the future looks promising for the utility sector. Hence, investors should scoop up such stocks trading at a discount and hold them till their prices move north.
Fed Raises Rates by a Quarter Point
Fed Chair Janet Yellen and her colleagues raised interest rate in March. Citing an improving labor market and greater confidence in consumers, the Fed raised its federal funds rate to a range of 0.75% to 1%. Future rate hike expectations scaled higher as well. The Fed’s “dot plot”, a table of policymakers’ projections for short-term interest rates, also penciled two rate hikes for this year.
But, investors have been expecting an even more aggressive rate hike forecast. Fed’s cautious approach negatively impacted bond yields, while high-dividend paying utility stocks became alluring. These stocks benefit from drawing the attention of many conservative, income-focused investors who might have otherwise invested in bonds (read more: 5 Biggest Winners from the Fed Rate Hike).
Markets Spooked by Healthcare Vote
Trump has promised to cut the corporate tax rate from 35% to 15%. As a result, sectors that currently pay the highest in corporate taxes stand to gain the most from a decrease in the marginal tax rate. On the other hand, utilities which currently have the benefits of tax exemptions won’t gain much.
However, euphoria over Trump’s agenda to “make American great again” failed a critical test on colliding with the realities of U.S. politics. Trump suffered a major blow after the Republicans withdrew the American Health Care Act, with financial markets getting increasingly skeptical on whether he will be able to deliver on the other economic policies such as tax reforms. Thus, other sectors don’t enjoy any advantage over utilities, at least for the time being (read more: Wall Street Spooked by Healthcare Vote: 5 Safe Value Picks).
Trump to Offer Federal Coal to Industry
Trump’s administration, in the meantime, has decided to re-open federal lands to new coal leases. This will lift Obama administration’s temporary ban on new federal coal leases as part of a broad environmental review to ensure that royalties from lease deals give fair returns to taxpayers.
The present government’s move is a win for miners seeking to expand production. About 40% of all U.S. coal comes from federal lands, mainly in the Powder River Basin in Wyoming and Montana. This should also boost electricity generation as coal accounts for a third of such production.
4 Top Value Stocks from the Utility Sector
As mentioned above, the broader trend for the utility sector seems encouraging. Thus, investors should buy stocks from the sector that are perceived to be “bargains” or are undervalued so that once the sector regains its true potential; share prices for such stocks will gain ground.
In value investing, investors hold a stock until it meets its target price and sometimes even longer, provided the company demonstrates continued profitability. Thanks to our new style score system, we have been able to identify four value stocks. Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the value investing space.
CenterPoint Energy, Inc. (CNP - Free Report) operates as a public utility holding company in the U.S. The company’s Electric Transmission & Distribution segment offers electric transmission and distribution services to retail electric providers, municipalities, electric cooperatives, and other distribution companies. CenterPoint Energy has a Zacks Rank #2 and a Value Style Score of ‘B’. The company is projected to give a return of 11.20% this year, more than the Utility - Electric Power industry’s estimated increase of 4.6%. The company has outshined the industry in the last one year (+30.3% vs. -0.7%). You can see the complete list of today’s Zacks #1 Rank stocks here.
MYR Group Inc. (MYRG - Free Report) provides electrical construction services in the U.S. The company has a Zacks Rank #1 and a Value Style Score of ‘B’. MYR Group is likely to gain 38% this year, more than the Electric Construction industry’s estimated addition of 25.10%. The company has outperformed the industry in the last one year (+63.3% vs. +23%).
Atlantica Yield PLC owns, manages, and acquires renewable energy, conventional power, electric transmission lines and water assets. The company has a Zacks Rank #2 and a Value Style Score of ‘B’. Atlantica Yield is projected to give a return of 44.90% next year, more than the Utility – Electric Power industry’s estimated increase of 3.70%. The company has outshined the industry in the last one year (+13.8% vs. -0.7%).
Polar Power Inc (POLA - Free Report) is engaged in designing, manufacturing and selling direct current (DC) power systems for applications primarily in the telecommunications, military and electric vehicle. The company has a Zacks Rank #2 and a Value Style Score of ‘B’. Similar to the Electric Power industry, Polar Power is projected to yield a steady return of 3.4% this year.
Curious about the utility sector? Check out the podcast below which takes a closer look at the 2017 market for this in-focus segment:
More Stock News: 8 Companies Verge on Apple-Like Run
Did you miss Apple's 9X stock explosion after they launched their iPhone in 2007? Now 2017 looks to be a pivotal year to get in on another emerging technology expected to rock the market. Demand could soar from almost nothing to $42 billion by 2025. Reports suggest it could save 10 million lives per decade which could in turn save $200 billion in U.S. healthcare costs.
A bonus Zacks Special Report names this breakthrough and the 8 best stocks to exploit it. Like Apple in 2007, these companies are already strong and coiling for potential mega-gains. Click to see them right now >>
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4 Stocks Value Investors Will Love in the Utility Sector
U.S. utilities lagged the broader equity markets over the last several months. However, it’s expected that the two major headwinds responsible for the sectors’ underperformance will fizzle out in the long run.
Utilities have been affected by the rise in long-term interest rates. The Fed, however, after hiking rate this month, signaled at only two more hikes by the end of the year, bringing disappointment to traders who had pinned hopes on a more hawkish tone. Such a tempered outlook is a blessing in disguise for dividend payers like utilities.
Many observers also believed that the sector has some earnings risk, thanks to potential tax reforms under President Trump administration. However, Trump’s failure to repeal and replace Obamacare has cast doubts on the efficiency of his administration to deliver on the other pledges including tax cuts. Ironically, Trump is to reverse former President Barack Obama’s 2016 ban on new federal coal leases, which will in turn drive U.S. electricity production.
Despite the initial hiccup, the future looks promising for the utility sector. Hence, investors should scoop up such stocks trading at a discount and hold them till their prices move north.
Fed Raises Rates by a Quarter Point
Fed Chair Janet Yellen and her colleagues raised interest rate in March. Citing an improving labor market and greater confidence in consumers, the Fed raised its federal funds rate to a range of 0.75% to 1%. Future rate hike expectations scaled higher as well. The Fed’s “dot plot”, a table of policymakers’ projections for short-term interest rates, also penciled two rate hikes for this year.
But, investors have been expecting an even more aggressive rate hike forecast. Fed’s cautious approach negatively impacted bond yields, while high-dividend paying utility stocks became alluring. These stocks benefit from drawing the attention of many conservative, income-focused investors who might have otherwise invested in bonds (read more: 5 Biggest Winners from the Fed Rate Hike).
Markets Spooked by Healthcare Vote
Trump has promised to cut the corporate tax rate from 35% to 15%. As a result, sectors that currently pay the highest in corporate taxes stand to gain the most from a decrease in the marginal tax rate. On the other hand, utilities which currently have the benefits of tax exemptions won’t gain much.
However, euphoria over Trump’s agenda to “make American great again” failed a critical test on colliding with the realities of U.S. politics. Trump suffered a major blow after the Republicans withdrew the American Health Care Act, with financial markets getting increasingly skeptical on whether he will be able to deliver on the other economic policies such as tax reforms. Thus, other sectors don’t enjoy any advantage over utilities, at least for the time being (read more: Wall Street Spooked by Healthcare Vote: 5 Safe Value Picks).
Trump to Offer Federal Coal to Industry
Trump’s administration, in the meantime, has decided to re-open federal lands to new coal leases. This will lift Obama administration’s temporary ban on new federal coal leases as part of a broad environmental review to ensure that royalties from lease deals give fair returns to taxpayers.
The present government’s move is a win for miners seeking to expand production. About 40% of all U.S. coal comes from federal lands, mainly in the Powder River Basin in Wyoming and Montana. This should also boost electricity generation as coal accounts for a third of such production.
4 Top Value Stocks from the Utility Sector
As mentioned above, the broader trend for the utility sector seems encouraging. Thus, investors should buy stocks from the sector that are perceived to be “bargains” or are undervalued so that once the sector regains its true potential; share prices for such stocks will gain ground.
In value investing, investors hold a stock until it meets its target price and sometimes even longer, provided the company demonstrates continued profitability. Thanks to our new style score system, we have been able to identify four value stocks. Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the value investing space.
CenterPoint Energy, Inc. (CNP - Free Report) operates as a public utility holding company in the U.S. The company’s Electric Transmission & Distribution segment offers electric transmission and distribution services to retail electric providers, municipalities, electric cooperatives, and other distribution companies. CenterPoint Energy has a Zacks Rank #2 and a Value Style Score of ‘B’. The company is projected to give a return of 11.20% this year, more than the Utility - Electric Power industry’s estimated increase of 4.6%. The company has outshined the industry in the last one year (+30.3% vs. -0.7%). You can see the complete list of today’s Zacks #1 Rank stocks here.
MYR Group Inc. (MYRG - Free Report) provides electrical construction services in the U.S. The company has a Zacks Rank #1 and a Value Style Score of ‘B’. MYR Group is likely to gain 38% this year, more than the Electric Construction industry’s estimated addition of 25.10%. The company has outperformed the industry in the last one year (+63.3% vs. +23%).
Atlantica Yield PLC owns, manages, and acquires renewable energy, conventional power, electric transmission lines and water assets. The company has a Zacks Rank #2 and a Value Style Score of ‘B’. Atlantica Yield is projected to give a return of 44.90% next year, more than the Utility – Electric Power industry’s estimated increase of 3.70%. The company has outshined the industry in the last one year (+13.8% vs. -0.7%).
Polar Power Inc (POLA - Free Report) is engaged in designing, manufacturing and selling direct current (DC) power systems for applications primarily in the telecommunications, military and electric vehicle. The company has a Zacks Rank #2 and a Value Style Score of ‘B’. Similar to the Electric Power industry, Polar Power is projected to yield a steady return of 3.4% this year.
Curious about the utility sector? Check out the podcast below which takes a closer look at the 2017 market for this in-focus segment:
More Stock News: 8 Companies Verge on Apple-Like Run
Did you miss Apple's 9X stock explosion after they launched their iPhone in 2007? Now 2017 looks to be a pivotal year to get in on another emerging technology expected to rock the market. Demand could soar from almost nothing to $42 billion by 2025. Reports suggest it could save 10 million lives per decade which could in turn save $200 billion in U.S. healthcare costs.
A bonus Zacks Special Report names this breakthrough and the 8 best stocks to exploit it. Like Apple in 2007, these companies are already strong and coiling for potential mega-gains. Click to see them right now >>