Because they typically pay high dividends, utilities are often a stand in for bonds. And like bonds, utilities are sensitive to interest rates. According to CNBC the prospect of the Fed raising interest rates has already hurt utilities. The time to sell utilities started last month!
As investors eye a December rate hike, one group of stocks could be in real trouble.
The S&P 500 utilities sector has been the worst-performing sector of late, losing almost 6 percent in one month. Since utilities stocks pay high dividends, they are particularly sensitive to rising interest rates. And as more traders begin to expect a move from the Federal Reserve next month, Gina Sanchez of Chantico Global said this is only the start of a sell-off in utilities.
However, it is not yet time to sell all utilities.
One name that looks particularly attractive is Duke Energy, said Eddy Elfenbein, editor of the Crossing Wall Street blog. Duke Energy has fallen more than 21 percent year to date, but Elfenbein said the stock could be a good portfolio addition given its high dividend yield.
If you like utilities over the long run it might be time to sell utilities now and pick up a few at bargain prices after rates have gone higher.
When Will It Happen?
The Fed has been hinting at an interest rate increase for a year and a half. Now as unemployment is down to 5%, manufacturing is heading back up and the first hint of price inflation has occurred most analysts expect the Fed to raise rates in December. Forbes concurs that the Fed’s interest rate rise will be in December.
Even before the latest inflation figures, the US numbers for October, the general consensus was that the Federal Reserve is going to start raising interest rates at their December meeting in the 15th and 16th of that month. Now that we’ve seen those inflation numbers barring any further surprises then we’re close to a stone cold certainty that rates will indeed start rising next month.
The problem for the Fed is that if they raise rates too soon and too high it could choke off the recovery from the worst recession since the Great Depression. If they wait too long inflation could get ahead of them. Typically it takes around a year and a half for an increase in interest rates to work its way through the economy and reduce inflation. If you own them it might just be time to sell utilities before rates go up and stock prices fall.
What to Sell
With higher interest rates as lower utility prices in mind Investor Place lists 7 electric utility stocks to sell now.
This week, 7 Electric Utilities stocks are worse, according to the Portfolio Graderdatabase. Each of these rates a “D” (“sell”) or “F” overall (“strong sell”).
The stocks listed by Investor Place are these:
- Entergy Corporation (ETR)
- Cleco Corporation (CNL)
- Exelon Corporation (EXC)
- PNM Resources, Inc. (PNM)
- Otter Tail Corporation (OTTR)
- Companhia Energetica de Minas Gerais SA Sponsored ADR Pfd (CIG)
The best time to sell energy stocks was a month ago. But there is still time to get out for the near term. And, as we noted, there are also strong buys for the long term that will be more attractive when their prices fall a bit.