by Michael Tarsala, CMT
This is perverse. And it’s why I think the outperformance of utility stocks cannot last forever.
As Bespoke Investment Group notes, the PE ratio of utility stocks is now higher than that of the technology sector!
That’s only happened twice. Once was in the late 2008 financial crisis, and the other was last summer’s selloff on Europe’s debt concerns.
I’ve been looking at utilities relative to other stocks in a slightly different way — simple price movement.
Source: Stockcharts.com
I’ve made the case in recent weeks that their run looks long in the tooth. More evidence to that effect: The RSI signal at the top of the chart is now rolling over from a near-extreme.
Of course, I speak of the group in generalities.
Here’s what Bill DeShurko of the Dividend and Income Plus model had to say about the utilities run:
During the first quarter when the S&P was rising, utilities sold off a little bit. Which is natural. But now, utilities that are using natural gas are prime, partly because of the incredibly cheap cost of that energy.
It’s true, some of these utilities are now in the 14 to 15 PE ratio range, which is high. But you have to pick and choose in this group. I’m not a fan of the XLU for that reason.
And that ‘s what we do: we pick and choose. One of the companies in our model is PPL Corp. (PPL), an electric utility. The current PE is about 10 times, and the forward PE on the stock is around 11 to 12 times, with a 5.2% dividend yield.
So DeShurko makes a great point. I think an active manager may still be able to find good picks in this sector.
But I am starting to wonder whether the move to utilities as a safe-haven is almost played out.
If it is, maybe that’s a good thing for the overall risk-on trade.
