(Premium) Utilities Sector Deep Dive – July

There is perhaps no sector which exemplifies ‘risk-off’ more than Utilities. No sector has more consistent earnings, thanks to business which are highly regulated and rely heavily on long-term contracts. The Utilities also tend to pay large, stable dividends. These characteristics make them attractive places for investors to hide during economic turbulence (real or imagined).

Unsurprisingly, the sector outperformed during 2022, when US stocks were in the midst of their first extended bear market in more than a decade. But that bear market is a thing of the past. Utilities set their relative peak last October and have disappointed ever since.

It started (as is often the case) with a failed breakout above a former high. Initially, it seemed that the ensuing decline was simply a mean reversion before a resumption of the uptrend. But after the ratio broke to 10-month lows at the end of January, the reversal was clear.

We’ve been underweight Utilities for most of the year, and we’ve been given no reason to change our opinion. Utilities are in a relative downtrend until they prove otherwise.

To be clear, that isn’t a bad thing. Utilities should underperform during bull markets. That’s a healthy indicator of risk appetite, which is what drives prices higher. What would concern us more is if the sector was breaking down on an absolute basis. For now, that’s not what’s happening.

So it’s not that we want to be shorting Utilities – this is still a bull market. We just want to be looking at other areas of the market. The opportunity cost of holding a bunch of underperforming Utilities is too high.

The exception is Atmos Energy. For now, it’s a choppy mess that we don’t want any part of. But we can own it if it gets above the former highs near $120, with a target up near $145.

The rest of the sector is a bag of frustration that’s better left alone.

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