Has Utilities’ Sharp Growth Cut Down on Their Value Proposition?
Utilities have experienced unexpected growth thus far in 2019, even beating the S&P 500. So has their value proposition taken a beating?
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An Unbelievably Great Year for Utilities
Utilities have generally experienced a good year. Motley Fool analyst Reuben Gregg Brewer observes that the Vanguard Utilities ETF is up 22% thus far in 2019. This rapid growth is not something usually expected of utilities as they are the kind of dividend stocks that are slow and steady. But this year they’ve even overtaken the S&P 500 Index! The index has only risen by 19%. So should you be acquiring utility stocks?
Should You Go Ahead and Grab Some Utility Stocks?
Brewer puts forward some points. Utilities are primarily considered by investors looking for safety. There is always a demand for resources such as water and energy no matter what the economic situation is, and these are the things that utilities sell. Brewer also observes that these utility stocks usually have a monopoly in their geographic region so they don’t experience the danger of their customers switching to rival providers. So they usually are safe stocks to hold on to in the event of a recession.
The fears of recession are around because we’re in the midst of one of the longest periods of economic expansion, while there are indications of slowing economic growth all over the world. The US economy can’t go on expanding, so a recession is expected. Investors have therefore been quite busy in getting safe assets such as utility stocks, just to be safe during the expected recession. This buying spree has resulted in the utility sector having an impressive growth this year.
Utilities Aren’t Chosen by Investors Looking for Fast Growth
But utilities really aren’t chosen by investors looking for fast growth, since they aren’t known for that. They aren’t exactly high-growth stocks. The services utilities offer are controlled by the respective governments so the rates they charge need to be approved by them. So these stocks tend to experience steady but gradual increases rather than the rapid growth experienced so far in 2019. The utility sector’s USP is reliable and dependable dividend income. So these share price hikes that we see are not normal and could actually be enough reason for you to exercise caution, says Brewer.
Here’s a reminder of some of the major stocks in this sector that have tasted impressive growth – The Southern Company ($SO), NextEra Energy ($NEE) and Dominion Energy ($D). Take a close look at these, of which Dominion has faced the least growth, 13% when compared to Southern’s mammoth 40% and NextEra’s 34%.
The Value Proposition Still Works for Some Utility Stocks
This abnormally impressive run has left some stocks quite expensive. That does put a dent on the value image of these stocks. But as Brewer points out, if investors have a clear understanding of what they’re buying, going for expensive utilities won’t necessarily pose any harm. But there could still be some utility stocks that offer more value than the others, the more expensive ones.
Brewer’s word of caution for investors is to completely understand the company before making the investment, because some aren’t worth paying the price they currently fetch. But with proper research and awareness of the stocks in the utility sector, you can still find some high value ones that suit your long-term requirements. But don’t make the plunge without adequate research. Let advanced stock trading software help you carry out smooth trading.
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