What are we looking for?
U.S. utilities stocks looking well valued after a recent pullback.
Upcoming actions of the U.S. Federal Reserve have been a topic of intense speculation by market watchers over the past year. With many investors now expecting a December rate hike, interest-rate-sensitive stocks such as utilities have lagged the market. In fact, utilities have been the poorest performing sector of the U.S. market recently – down 4.8 per cent over the past four weeks. This recent underperformance has left some utilities stocks looking attractive based on dividend yield and earnings growth projections.
The screen
We begin by setting a minimum market capitalization threshold of $10-billion (U.S.) to focus on larger, more established utility stocks in the U.S. market. Next, to find utilities stocks that have already moved lower recently, we will screen for stocks with negative price performance over the preceding four weeks.
Earnings per share growth is also a key aspect of our strategy, so we will screen to find stocks with EPS growth rates of 5 per cent or more (this year versus last year) based on analyst projections. To ensure we don't overpay for our investments, we will also filter based on a forward P/E ratio of 20 or less.
Last, since dividend yield is a key attraction of utility stocks, we will look for companies with a forward dividend yield of 3 per cent or more.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Leading our list is Entergy Corp., an electric utility providing service in the southern U.S. states of Louisiana, Arkansas, Mississippi and Texas. Entergy's stock price has declined almost 9 per cent over the past month. On Oct. 25, the company announced strong third-quarter results that beat analyst earnings estimates by a wide margin. As a result of its recent price slide, Entergy has the lowest forward P/E ratio on our list at 14.1.
PPL Corp., formerly known as Pennsylvania Power & Light, supplies about 10.5 million customers in the Northeastern United States. The stock is a strong dividend performer with a 4.5-per-cent yield. PPL has not declined as much in the past month as some if its peers, due partly to strong results issued in early August in which it handily beat analyst earnings expectations.
California-based PG&E is one of the largest utilities on our list with a market cap exceeding $30-billion. Down 3.3 per cent in the past month, the PG&E stock now has a 3.2-per-cent dividend yield and has very strong estimated earnings growth rate of 19.2 per cent.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.