Utilities Outperform: Now What?

Since mid-December 2015, the Dow Jones Utilities Average has rallied more than 12 percent—an impressive performance in what has been a dismal year for US equities.

These returns vindicate those of us who resisted the conventional wisdom that rising interest rates spell doom for utility stocks, increasing these companies’ costs of capital and reducing the value of future dividends.

But this success brings a new challenge: Many of our favorite utility stocks have rallied above our buy targets.

Although these stocks trade at lofty valuations today, weakness in the US economy and deterioration in key technical indicators suggest that equities could suffer further downside in coming months. Keep your powder dry and stay focused.

Our favorite utilities boast low costs of debt and equity capital that put them in prime position to accelerate their earnings and dividend growth by investing in renewable energy and gas distribution and transportation.

My colleague Elliott Gue has called for utility stocks emerge as the top-performing sector in the S&P 500 this year—I can’t say that I disagree. But investors must remain selective.