While utilities stocks have been among the worst performers this year, the sector and related exchange traded funds could be primed for a rebound.
Since the high at the end of January, the Utilities Select Sector SPDR (NYSEArca: XLU) has declined 10.2%.
Following the 10% correction, value investors may find a bargain in the utility sector. For instance, Evercore ISI’s head of technical analysis, Rich Ross, points to the pullback in the PHLX Utility Sector Index (UTY) as an opportunity to buy, reports Amanda Diaz for CNBC.
Looking at the charts, the utilities sector has been on a strong uptrend over the past 12 months, Ross said. In the recent months, we have witnessed a sharp turnaround from the January highs.
“What I think, is that this has created a compelling buying opportunity,” Ross said.
Specifically, Ross points out that the pullback in utilities has brought the index back to a critical support level and prior resistance.
“Technical analysis teaches us that prior resistance becomes new support on a pullback, and that’s exactly what’s happened here with the utilities,” Ross added.
Looking at XLU’s weekly chart, the ETF has been making higher lows and recently tested its 50-day simple moving average but has bounced back about 1.4% over the past week. Technicians have pointed out if a stock or index finds it difficult to break through an area of resistance, the more resilient that resistance level becomes.
Along with the support levels, the combination of the recent pullback and low interest rates help make utilities a more attractively priced.
“In late January, the median U.S. utilities valuation hit the highest level ever since Morningstar began covering utilities,” according to Moringstar‘s director of utilities equity research. “The February swoon cut that premium in half. We also cut our cost of capital assumption in our discounted cash flow valuations to reflect historical inflation and real interest rates, bringing valuation premiums down another 10%. As of mid-March, utilities’ median valuation was only slightly above market prices and in line with valuations in late 2013 before the 27% run in 2014.”
Utilities Select Sector SPDR
For more information on the utilities sector, visit our utilities category.
Max Chen contributed to this article.