With concerns about rising interest rates creeping back to the forefront of investors’ minds, the Utilities Select Sector SPDR (NYSEArca: XLU) is off 2.7% over the past month. Add to interest rate sensitivity, utilities stocks and exchange traded funds face some concerns about valuation.
While volatility spiked in global markets, investors may have found solace in U.S. utilities, which have a small global footprint. Moreover, with the Federal Reserve pushing off on an interest rate hike, dividend-yielding utilities also attracted income-minded investors.
Looking at the utilities profit outlook, Capital IQ estimates that the sector could post earnings growth of 0.9% for the third quarter and 1.7% for all of 2015.
In contrast, the S&P 500 is expected to see earnings decline of 4.5% for Q3, which was downwardly revised since the start of the third quarter, according to FactSet data, as energy and multinational sectors weighed on the broader index. Those data points underscore the predictable though often slow-growth profit outlooks seen in the utilities sector.
“Utilities have played their traditional defensive role during the correction in August, but XLU has slightly underperformed the broad market last 6 months. Looking at the valuation and quality charts above, only one industry looks attractive: Independent Power Producers and Energy Traders. Its industry P/E factor points to a fair pricing, and the 2 other factors are better than their historical averages. At the opposite, Electric and Gas Utilities look the less attractive, the 3 factors being worse than averages,” according to a Seeking Alpha post on XLU.
Over the long-term, the utilities sector could continue to generate steady profits as the industry expands operations. According to S&P Capital IQ Equity Analyst Christopher Muir, the utilities industry is experiencing high levels of capital spending on regulated capital spending through infrastructure replacement, new transmission and distribution facilities, and regulated power plants. Additionally, unregulated spending will focus on natural gas-fired combined-cycle power plants and investments in solar and wind.
“However, there may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table,” adds the Seeking Alpha post.
Utilities Select Sector SPDR
