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Consider Taking Profits on Utility Stocks

Analysis of the Utilities Sector

It is unusual that the utilities sector becomes the most overvalued sector according to ValuEngine, but it has done just that. The utilities sector is 12.9% overvalued, which is a solid reason to book profits on the Utilities Select Sector SPDR.

The pop-up table above shows that only seven of the 31 stocks in the XLU are undervalued, with PPL Corp. (PPL) undervalued by 20.0% and AES Corp. (AES) undervalued by 14.9%. Both have buy ratings according to ValuEngine, with reasonable price-to-earnings ratios of 11.4% and 12.0%, respectively.

Looking at the performance measures, 23 of the 31 stocks in the XLU are up by double-digit percentages over the past 12 months, led by NextEra Energy (NEE - Get Report), which is up 30.5%; Sempra Energy (SRE - Get Report), which is up 43.1%; Wisconsin Energy (WEC - Get Report), which is up 35.3%; CMS Energy (CMS - Get Report), which is up 32.0%; and Pinnacle West Capital (PNW), which is up 31.5%.

NextEra reached a multiyear high on Friday. Its all-time high is $73.75 and was set back in January 2008.

Sempra Energy set an all-time high at $71.10 on Friday. Wisconsin Energy reached its all-time high at $41.30 on July 20. CMS Energy set an all-time high of $24.90 on Friday. Pinnacle West also set a new all-time high on Friday at $54.66.

Each of these stocks have a buy rating according to ValuEngine, but buying these now is betting on a continuation of momentum. This is a risky investment strategy as stodgy utility stocks are typically not momentum stocks.

To summarize the downside risk, if the XLU declined to its 200-week simple moving average at $31.19, the loss would be 18.1%, which would wipe out five years of dividend payments.

At the time of publication, Suttmeier held no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading Treasury securities in the primary dealer community. In 1981 he formed the government bond department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined in 2008 producing newsletters covering the U.S. Capital Markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy. You can reach Richard at
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XLU $42.58 -0.82%
CMS $34.81 -0.60%
NEE $98.76 -0.65%
SRE $99.84 -0.44%
WEC $49.09 -0.59%


Chart of I:DJI
DOW 17,839.85 +27.66 0.16%
S&P 500 2,090.63 +1.49 0.07%
NASDAQ 5,114.0660 +11.2580 0.22%

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