We cap off our series utilizing PVGO by applying it to the top 5 stocks in the Utilities sector. Utilities are severely beaten down this year due to surging Treasury yields. They depend on significant debt financing, and Treasury bonds have become a viable substitute as low-risk income-generating instruments. This has culminated in Utilities trading at cheap valuation ratios compared to recent history and presents an opportunity for when rates begin falling. As bond yields return to levels more consistent with the post-GFC era, investors will look elsewhere for yield. Utilities are positioned to benefit significantly from such a rotation in terms of both risk and reward.
As we wrote previously, “PVGO assumes the market price is fair value and calculates the company’s value based on current earnings, assuming no future earnings growth. Then, the PVGO is calculated as the difference between the market price and the company’s value without growth. Finally, the PVGO is divided by the stock price to find the proportion of the market price attributable to future growth expectations.”
Notice that all five stocks have a dividend yield equal to or below the yield on a 10-year Treasury note (~4.67%) and a PEG ratio near that of the market. The second thing to note is that all five are priced for little to no growth (and, in some cases, even decline). With NEE being the largest stock in the sector and boasting the second-lowest PEG ratio, it appears to be in a prime position to benefit from falling rates. However, it also carries the lowest dividend yield.
Company Summaries
NextEra Energy, Inc. (NEE)
The Southern Company (SO)
Duke Energy Corporation (DUK)
American Electric Power Company, Inc. (AEP)
Exelon Corporation (EXC)
Five for Friday
Five for Friday uses stock screens to produce five stocks that we expect will outperform if a particular investment theme plays out in the future. Investment themes may be relevant to the current or expected market, industry and/or economic trends. Investment themes may not always represent our current forecast.
Disclosure
This report is not a recommendation to buy or sell the named securities. We intend to elicit ideas about stocks meeting specific criteria and investment themes. Please read our disclosures carefully and do your own research before investing.
Michael Lebowitz, CFA is an Investment Analyst and Portfolio Manager for RIA Advisors. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. CFA is an Investment Analyst and Portfolio Manager; Co-founder of 720 Global Research.
Follow Michael on Twitter or go to 720global.com for more research and analysis.
Customer Relationship Summary (Form CRS)