As Market Sell-Off Accelerates, Some Utility Stocks Look More Attractive
Investing.com | Mar 23, 2020 01:21PM ET
Financial markets are crashing hard as the coronavirus pandemic tightens its grip, threatening economies, livelihoods and lives across the globe. It’s hard to tell when markets will hit the bottom.
Economists and analysts at the world’s largest investment banks are struggling to put together their best estimates to give some direction to investors who have never seen a plunge of this magnitude happening so fast.
So, is there any scope for braving the beast, at least when investing? Some analysts think there may be. Strategists at Bank of America, for example. believe the current indiscriminate selling creates a unique opportunity for investors to cherry pick individual equities because the market rout since February has seen little differentiation between stocks.
“Best opportunity to pick stocks. Maybe ever,” Bank of America equity and quantitative strategist Savita Subramanian said in a note to clients last week. “Given the uniform penalty for stocks during the selloff, the opportunity for differentiated stock selection is arguably higher vs in prior down markets.”
Analysts at Goldman Sachs, on the other hand, see more pain ahead, possibly another 16% decline for the S&P 500 after a 30% plunge during the past four weeks.
“A further decline in investor equity positioning, in concert with thin liquidity and a reduction in corporate buybacks, should cause the S&P 500 to fall to our estimated trough of 2000,” Arjun Menon, U.S. portfolio strategist at Goldman, said in a note. The 2,000 target for the bottom represents a 16% drop for the S&P 500 from Thursday’s close of 2,409.
There is no doubt that the coronavirus is a deadly disease and there is no endgame in sight when governments globally are still struggling to contain the disease in the absence of a vaccine. But, in our view, this pandemic-triggered crash offers a remarkable opportunity to buy stocks, especially those that are inherently low risk and provide income.
h2 Utility Stocks Becoming Appealing/h2In this uncertain environment, utilities that provide power, gas, water, and telecom services to consumers are low-risk investments at a time when the coronavirus pandemic is hurting demand for other industries. In general, these companies regularly increase payouts, in many cases they've been boosting their dividends for decades.
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Holding these shares over the long-term is a great way to ensure a steady income flow with above-average yields, even when other areas of the market go through sharp adjustments.
For example, shares of American Water Works (NYSE:AWK), a Camden, N.J.-based utility that provides drinking water in multiple states, have dropped about 27% in this market rout. The shares ended Friday's session down 12.5% at $100.69.
Similarly, Evergy (NYSE:EVRG), which provides electricity to customers in Kansas and Missouri, has plunged 35% during the past four weeks of selling. It closed on Friday down 14% at $47.18, yielding 3.67%. The utility pays $0.505 a share each quarter, while American Water Works has a similar quarterly payout but yields 1.74%.
With the market getting crushed, telecom utilities are looking attractive again. They are the providers of wireless services and connectivity to millions of consumers currently working from their own homes.
In this space, we like the wireless service provider Verizon (NYSE:VZ), which remains largely insulated from any coronavirus impact, though equipment sales could see some declines due to supply constraints and store closings. Down about 17% in the past month, its shares fell 3.4% on Friday to close at $51.80. They now yield 4.59%, on a quarterly dividend of $0.615.
Bottom Line
Utility stocks are becoming attractive again after this steep sell-off and they could become even more appealing in coming weeks if the coronavirus pandemic accelerates indiscriminate selling. Whether you’re looking at utilities or other sectors, the key to successful investing is to always stay diversified and focus on the long term.
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