Warren Buffett once said, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” I fully agree.
Trending economic condition
The rebounding housing market and rising Dow Jones are wreaking havoc within the utility sector. Traditionally known as safe, dividend paying investments, utility stocks are now being sold like hotcakes.
One major reason is because of the increase in bond yields, which provide another competitive option for income. Another explanation could be the influx of capital into high growth sectors like technology or industrials. As a result, though, new opportunities are looming.
Behind the scenes glance
As seen below, the Utilities Select SectorSPDR ETF is the largest ETF connected to utility stocks.
|Utilities Select Sector Top Holdings||Percent of Assets|
|Duke Energy Corp (NYSE:DUK)||9.64%|
|The Southern Company (NYSE:SO)||8.33%|
|Dominion Resources, Inc. (NYSE:D)||6.85%|
|NextEra Energy, Inc. (NYSE:NEE)||6.73%|
|Summation of Top Four||31.55%|
It is undergoing a major market beating. Over 31% of the ETF endured an 8% price decline just in the past month. It is improbable to think that 70% of the other stocks in the ETF—especially since they are in the same sector—could counter balance the decrease. For short term traders, this fund is abysmal. But for those with longer time horizons, a gold mine exists.
|Utilities Select Sector||Southern Company||Duke Energy||Dominion Resources||NextEra Energy|
|May 13′ Decline||8.14%||8.24%||10.63%||7.51%||7.02%|
With an infinitesimal beta and a market cap of almost $40 billion, The Southern Company (NYSE:SO) is here to stay. As further proof, the firm recently increased its quarterly dividend payment. Southern has never missed a dividend payment to its shareholders since its founding in 1948.
Additionally, it is trading at a discount. As of the most recent quarter, just Southern’s property, plant, and equipment will pay down all liabilities by 112%. Further, the firm’s year over year quarterly revenue growth rate is 8.1% and its operating margin TTM is almost 24%. Further analysis reveals that it is almost nearing its year low support level. The firm is a good buy.
Duke Energy Corp (NYSE:DUK) is the largest electric power company in America, and it continues to prosper. Assuming its expected $2.1 billion TTM will be met in 2013, Duke’s net income will increase nearly 60% since 2010. Further, the firm’s high dividend yield and low beta make it even more attractive.