Over the past month, as shown by the chart below, despite all-time highs in equity indices, utility stocks have been under selling pressure.
ED data by YCharts
This should not come as a complete surprise given the defensive nature of the industry. However, it should be noted that prior to this recent sell-off the utility sector had been among market leaders, not laggards. There are a few reasons behind the sector-wide sell-off:
1. Increasing interest rates.
The recent rise in interest rates is a negative for utility stocks because utility stocks tend to be among the highest yielding in the market. Higher yielding bonds serve as better competition to utility stocks.
2. Defensive nature
Investors have likely started rotating into more cyclical stocks as data continues to suggest an improving economy. Utilities will not benefit much from an improved economy, and thus investors are likely betting that there are better places to be invested.
3. High valuations
Generally speaking, as shown by the chart below, many of the utility stocks such as Consolidated Edison, Inc. (NYSE:ED)
, Dominion Resources, Inc. (NYSE:D)
, and Public Service Enterprise Group Inc. (NYSE:PEG)
have been trading close to their historic high valuations. Given this, it makes sense that investors are selling at these valuations to move into other sectors.
ED Forward PE Ratio data by YCharts
Johnson & Johnson (NYSE:JNJ)
is a likely candidate to follow utility stocks lower. Much like a utility, J&J pays a healthy divided (currently 3%) and has attracted income-seeking investors. Due to this, it is not unreasonable to expect J&J to come under some selling pressure as interest rates rise. Also, J&J is a defensive name with minimal exposure to economic trends. Finally, as shown by the chart below, J&J is also trading at historically high valuations.