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Bond Proxies Like Utilities Are Looking Expensive

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But there also are less obvious momentum names.

As I’ve pointed out recently, yield plays– such as those in the utilities sector – were some of the best-performing stocks last year. While investors don’t typically think of these stocks as “momentum” names, their relative valuations are stretched. In addition, like biotech, they have benefited from a steady inflow of money and warrant caution.

Utilities are looking wary as rate-hike fear looms.

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Market Realist – The utilities are looking expensive as interest rate hike fear looms.

The graph above shows the price performance of the utilities index (XLU), which returned 19.7% since 2014. Among its components, Duke Energy (DUK) returned 17.5%, NextEra Energy (NEE) returned 19.8%, and Dominion Resources (D) returned 20.7% during the same period. As the graph suggests, the sector has given negative returns in 2015 so far, which has brought those figures down. The sector has lost 25% of its gains in 2014.

The utilities sector is often known as a bond proxy. This is because, like bonds (AGG), utilities underperform when interest rates rise. With interest rates poised to rise this year, utilities have underperformed this year.

Also, the utilities sector, like the consumer and biotech sectors, is looking expensive. The sector is trading at 17.2x its earnings. While it doesn’t look extortionately expensive, the sector has historically traded at a discount to the broader index. The ten-year average of the sector is ~15x.

The next part of this series explains which pockets within equities appear to have value.

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