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What are we looking for?

U.S.-listed small-cap utilities stocks for a defensive play.

The S&P 500 has been struggling to stay above its 50-day moving average over the past couple of weeks. If the index closes below key long-term support around the 2,785 level, which was key resistance back in November and December, we may see downside pressure to test March lows.

To be clear, markets are pulling back from their record highs: A break below major short-term support in the S&P 500 at 2,800 would equate to a 5-per-cent pullback from this month’s record high – hardly a correction, but a pullback is how bear markets start. No one knows whether this is the start of one, but we do know that stocks in defensive sectors have been gaining interest and pushing higher over the past two weeks, which may be a caution signal.

Using exchange-traded funds as a proxy for sectors, the Utilities Select Sector SPDR Fund (XLU) has returned 4 per cent over the past 10 days and remains a top sector in the market along with the Real Estate Select Sector SPDR Fund (XLRE) and the Consumer Staples Select Sector SPDR Fund (XLP). Investors are clearly adding defensive companies to their holdings.

As we approach June, it’s worth noting that the final month of the first half is historically bullish for small cap stocks. Over the past two decades, the Russell 2000 Index (a small-capitalization index of companies) has outperformed the S&P 500 84 per cent of the time in June.

The screen

We will be using Trading Central Strategy Builder to search for U.S. small-cap defensive utility stocks with low relative valuations when compared with their most recent reported earnings; good liquidity; positive price performance year-to-date; and a dividend yield above 2 per cent so we can get paid to wait for the market to rebound.

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What we found

Topping our list is Pattern Energy Group Inc. The power company owns a portfolio of wind power projects located in the United States, Canada and Chile. The company has a market cap of US$2.2-billion, a dividend yield of 7.7 per cent, and a P/E of 14.4, which happens to be the lowest of all the stocks in our screen results. The stock price recently bounced off its 200-day moving average (a key moving average watched by traders) as it moves toward May highs.

Another interesting company that appeared on our radar is OGE Energy Corp., a holding company for Oklahoma Gas & Electric, a regulated utility offering electricity generation, transmission and distribution to customers in Oklahoma and western Arkansas. It is the most liquid stock on our list with 1.4 million shares traded daily, on average, over the past 90 days. What impresses me is the long-term up-trend of the stock since the beginning of 2018. Prices are now within 2 per cent of the stock’s record high. From our studies, stocks that are making new record highs continue to trend higher over the next six months.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

U.S.-listed small-cap utilities stocks for a defensive play

RankCompanyTickerRecent Price (US$)Mkt. Cap. (US$ Bil.) P/EDaily Vol. (90-Day Avg.)Div. YieldYTD Rtn.1Y Rtn.
1Pattern Energy Group Inc.PEGI-Q21.842.214.4751,8287.7%18.0%23.1%
2Suburban Propane Partners LPSPH-N23.171.416.2169,98410.3%21.5%1.7%
3NorthWestern Corp.NWE-N72.073.617.2312,1923.2%20.8%34.0%
4Algonquin Power & Utilities Corp.AQN-N11.645.822.9278,7824.8%16.0%20.7%
5OGE Energy Corp.OGE-N42.968.620.61,406,2163.4%10.0%28.1%
6Black Hills Corp.BKH-N77.114.719.2363,5552.6%22.8%36.0%
7Portland General Electric Co.POR-N53.304.821.6544,9802.9%16.2%11.9%
8Spire Inc.SR-N85.354.320.0362,7612.8%15.6%22.0%
9Hawaiian Electric Industries Inc.HE-N41.904.622.0332,2773.1%14.4%25.3%
10El Paso Electric Co.EE-N59.442.424.9254,8232.4%18.9%6.1%

Trading Central

Gary Christie is head of North American research at Trading Central.