Top 5 Picks From the Best-Performing Sector in the Past Month

Wall Street has been suffering from severe volatility over the past three weeks, thanks to the resurgence of coronavirus globally in the form of its new variant – Omicron. Moreover, Fed Chairman Jerome Powell’s comment in the Senate testimony indicating a likely shift in central bank’s policies toward a more hawkish stance added to the volatility.

With market fluctuation becoming a regular phenomenon in the past three weeks, investors have started shifting funds to defensive sectors like utilities. At this stage, investment in stocks from these sectors and also with a favorable Zacks Rank will be prudent, at least for the near term. We have selected five such stocks. These include Dominion Energy Inc. D, Duke Energy Corp. DUK, California Water Service Group CWT, IDACORP Inc. IDA and NiSource Inc. NI.

Utilities: The Best Performer in the Past Month

The Utilities sector — one of the 11 broad sectors of the market’s benchmark the S&P 500 Index — has surged 4.4% in the past month while the benchmark itself fell 0.3% in the same time period. Consumer staples — another defensive sector — was the second-best performer, rising 3.3% in the past month.

However, year to date, the S&P 500 has rallied 24.3% while the utilities and consumer staples sectors have advanced 11% and 11.5%, respectively. Cyclical sectors like energy, materials, financials, industrials, consumer discretionary and growth sectors like technology have performed far better than defensive sectors so far in 2021.

Near-Term Concerns

The above-mentioned statistics clearly show that market participants are shaky for the time being and are unsure regarding a year-end Wall Street rally due to Omicron, mounting inflationary pressure and the possibility of a higher-than-expected market interest rate in 2022.

On Dec 13, U.K. Prime Minister Boris Johnson confirmed that at least one patient infected with the Omicron variant of coronavirus has died in the country. In the United States, 25 states have detected the presence of the Omicron variant of coronavirus so far. Since the outbreak of coronavirus in March 2020, more than 800,000 U.S. citizens have died after being infected by any variant of COVID-19.

Moreover, on Dec 15, at 2:00 PM EST, Fed Chairman Jerome Powell will give a press statement regarding the outcome of the last FOMC meeting of 2021. Market participants are overwhelmingly expecting the Fed to raise the tapering amount of its monthly bond-buy program from $15 billion to $30 billion. At this rate, the quantitative easing program will terminate in March 2022 instead of June targeted earlier.

The central bank has maintained the benchmark lending rate in the range of 0-0.25% since March 2020. With accelerated tapering, the first rate hike is now expected in second-quarter 2022 instead of the second half of 2022 anticipated earlier.

Utilities Immune to Vagaries of Economic Cycle

The Utilities sector is mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. It's because these companies provide basic services like electricity, gas, water and telecommunications, which can never go out of demand.

Consequently, adding stocks from the utility basket usually lends more stability to a portfolio in an uncertain market condition. Moreover, the sector is known for the stability and visibility of its earnings and cash flows. Stable earnings enable utilities to pay out consistent dividends that make them more attractive to income-oriented investors.

Utility companies enjoy a reputation for being safe given the regulated nature of their business, which lends their revenues a high level of certainty. These companies also benefit from the domestic orientation of their business, which shields them from foreign currency translation issues and a delay in global economic recovery.

Our Top Picks

We have narrowed our search to five utilities that have growth potential for the rest of 2021 and have seen positive earnings estimate revisions in the past 60 days. These companies are regular dividend payers. The dividends act as an income stream during a market downturn. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our five picks in the past month.

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Zacks Investment Research

Image Source: Zacks Investment Research

Dominion Energy has invested huge capital that will further strengthen its electric and natural gas infrastructure, and assist it in meeting customers’ demand. Contribution from organic as well as inorganic assets will boost the earnings of Dominion Energy.

The completion of Gas Transmission & Storage operations’ sale to Berkshire will help its transition toward regulated operations. Dominion Energy is adding clean energy units and targets to achieve carbon neutrality by 2050. It has enough liquidity to meet obligations.

Dominion Energy has an expected earnings growth rate of 9.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the past 60 days. The company has a current dividend yield of 3.28%.

Duke Energy operates as an energy company in the United States. DUK operates through three segments: Electric Utilities and Infrastructure, Gas Utilities and Infrastructure, and Commercial Renewables.

Duke Energy is a premier utility service provider that invests heavily in infrastructure and expansion projects. During the 2021-2025 period, it projects to spend $59 billion. DUK has lowered its carbon emissions by 40% since 2005 and aims to electrify all its light-duty vehicles by 2030.

Duke Energy has an expected earnings growth rate of 2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the past 60 days. DUK has a current dividend yield of 3.82%.

IDACORP’s systematic long-term capital investment to strengthen its infrastructure, expand customer base and improve economic conditions in its service territories will boost demand for utility services and drive the company’s performance.

IDACORP’s interest in transmission projects, debt management, cost control and production of more electricity from clean energy sources will act as tailwinds. IDA has ample liquidity to meet near-term debt obligations.

IDACORP has an expected earnings growth rate of 3.8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the past 30 days. IDA has a current dividend yield of 2.70%.

California Water Service Group’s investments in infrastructure will help it provide customers with efficient water and wastewater services. CWT continues to expand its operations through strategic acquisitions. With new rates coming into effect, its earning will get a further boost.

California Water Service Group is benefiting from consistent customer wins. It has ample liquidity to meet its near-term debt obligations. CWT continues to add shareholder value via regular dividend hikes.

California Water Service Group has an expected earnings growth rate of 0.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 7.6% over the past 60 days. CWT has a current dividend yield of 1.33%.

NiSource expects to invest $40 billion in the long-term utility infrastructure modernization program. The existing capex plans will further enhance the reliability of natural gas and electric operations, and help the company offer efficient services to NI’s expanding customer base.

NiSource continues to increase its clean power assets. Moreover, nearly 75% of NI’s investment is recovered within 18 months through rate hikes, which provides necessary funds to carry on infrastructure upgrade projects.

NiSource has an expected earnings growth rate of 3% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the past 60 days. NI has a current dividend yield of 3.35%.

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NiSource, Inc (NI) : Free Stock Analysis Report

Duke Energy Corporation (DUK) : Free Stock Analysis Report

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California Water Service Group (CWT) : Free Stock Analysis Report

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