What Does the Recent Recovery in Utilities Mean?
US utilities marginally recoup
US utility stocks took a breather last week after correcting more than 5% in the last few weeks. The Utilities Select Sector SPDR ETF (XLU) rose 0.7%, while the SPDR S&P 500 (SPX-INDEX) (SPY) rose 1.2% last week. However, the gains in utilities shouldn’t be contemplated as a strength in the near future given the strong rise in Treasury yields and the potential threat from Hurricane Nate.
Utility stocks and Treasury yields generally trade inversely to each other. Utility stocks are viewed as bond substitutes due to their stable dividends. Ten-year Treasury yields continued their upward march last week, reached 2.4%, and closed at a three-month high.
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Gainers and losers
Top utility stocks like NextEra Energy (NEE), Duke Energy (DUK), and Southern Company (SO) were strong during the week. NextEra Energy rose 0.6%, while leading regulated utility stocks Duke Energy and Southern Company each rose 0.9% last week.
US utility stocks have shown similar resilience in the last few months. Despite concerning valuations, investors are rushing back to safe-haven utilities after some correction.
PPL (PPL) was among the biggest losers from SPX Utilities—it lost 1.7% last week. Currency fluctuations in the pound compared to the US dollar were likely behind the weakness in PPL stock. PPL has more than half of its revenue coming from the United Kingdom, which is expected to face headwinds after Brexit.
One of the most volatile stocks in the sector, SCANA (SCG) fell marginally during the week. Morgan Stanley cut SCANA’s price target straight to $45 from $59 and rated it as “underweight” on October 4, 2017.