Thinking About Utility Stocks

For most of my career I did not spend much time on utility stocks. Almost by definition they have limited upside, and they depend heavily of state regulators.

However, there is a lot to learn from utility stocks, so please be patient. Since short-term interest rates have gone from 0% to 4%+ over the last 6 months many of these stocks are well off their highs. The good news is these stocks are relatively indifferent to levels of economic activity. The bad news is these stocks are highly dependent on changes in interest rates.

In a perfect world, I hope to find 20 ideas better than my best utility stock. But the world is not a perfect place, and sometimes you might just want a low beta stock to “hide” in. That is not a concept you will find in a standard investment textbook, but it is often a reality.

About a month ago I was watching CNBC and they were talking about analysts cutting there ratings on Dominion Energy. That made me think that maybe it was time to look at utility stocks for the first time in a very long time. Low interest rates had kept these stocks selling near there highs for almost a decade.

Ok, you get an idea to to think about utility stocks, what should you do next?

***** (I am going to use five stars when i am making a very important point)

***** A very critical first step is to define your industry very carefully, be sure you have at least glanced at every company in that industry.

I use the the “peers’ tab on Seeking Alpha, and then click on the “sector” tab and get 102 utility stocks. You could also use the Finviz website to get a list of about 115 companies (it looks like they double count some stocks). At this point on Seeking Alpha you could reduce you task to only 20 stocks if you narrowed your search to only a category called Multi-Utility, but I am going to look at Electric, Natural Gas, and Water utilities all in one group.

You could an entire year analyzing just these 100 utility companies. My approach was to take a quick glance at everybody, and then come back to some stocks that deserved a little more work. We will discuss what to look for in those quick glances with later industries, but here we will take what I call a top 10 method.