Utilities: A Stock-Picker’s Game in 2017

Shares of utilities and other essential-service companies have slipped from the highs hit earlier this month, reducing the number of Portfolio holdings that trade above our value-based buy targets to 14.

Whether this wavering marks the start of another leg down for the Dow Jones Utility Average remains to be seen. However, the recent rally creates a high bar of expectations and increases the risk that investors will view any hiccup as an excuse to take profits.

This month’s feature article highlights some of the macro catalysts that could send utility stocks lower.

The current environment favors stock-picking over broad-based exposure, a point underscored by the widening discrepancy between the top and bottom performers in the utility sector.

Although the Dow Jones Utility Average posted a total return of 18.2 percent last year, the index’s top performer beat the worst by 39 percentage points. This performance gap stands at 20 percentage points this year, despite the Dow Jones Utility Average gaining 5.4 percent. A retrenchment to normal valuations would widen this range.

At this point, only 37 stocks tracked in our 205-company Utility Report Card trade below our buy targets. In fact, several dozen best-in-class names that earn A or B Quality Grades in our proprietary system trade at levels where investors should consider taking a partial profit off the table.