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Number Cruncher Ten utilities stocks to hedge volatility during U.S. earnings season

What are we looking for?

The U.S. earning season is upon us, which usually brings a period of volatility along with it. The S&P 500 remains in a well-defined uptrend as the index remains above its rising 200-day moving average. The 20-day moving average is also above the 200-day, another bullish signal. U.S. markets continue to post record highs. Once you have identified the broad market trend, the next step is to identify the best sector that is helping support and lift the market higher.

The utilities sector remains the leader, with the Utilities Select Sector SPDR Fund (XLU) returning an impressive 19.7 per cent over the past year, followed closely by the Real Estate Select Sector SPDR Fund (XLRE) and the Consumer Staples Select Sector SPDR Fund (XLP). The worst-performing sector has been energy, with the Energy Select Sector SPDR Fund (XLE) declining 13.8 per cent over the past year.

Back in May, I screened for utilities stocks with low relative valuations when compared with their most recent reported earnings. The screen’s performance has only improved since then. As we enter earnings season, I update my search to find defensive utilities stocks in case we are entering a period of high volatility or a possible correction.

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The screen

We will be using Trading Central Strategy Builder to search for U.S.-listed utilities stocks with low relative valuations when compared with their most recent reported earnings; price performance of at least 5 per cent year-to-date; and a dividend yield of at least 2.5 per cent to generate cash flow if the uptrend stalls during earnings season.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Trading Central’s product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities.

What we found

At the top of our list is Suburban Propane Partners LP of New Jersey. The company distributes propane, fuel oil and other refined products to about one million customers in the United States, primarily in the East and West coast regions. Suburban has the highest dividend yield on our list at 10.1 per cent and a price-to-earnings ratio of 16.5, lower than the utilities sector average of 20.5. In terms of technical analysis, it’s worth noting that Suburban share prices broke above a long-term downtrend back in April. The company is slated to report earnings on Aug. 8.

Second on our list is Oakville, Ont.-based Algonquin Power & Utilities Corp., a North American generation, transmission and distribution utility company that trades in both Toronto and New York. Algonquin owns and operates regulated water, natural gas and electricity-distribution utilities. The company has the second-largest market capitalization on our list at US$6.1-billion. The current dividend yield is also the second highest at 4.5 per cent. The stock price has been in an impressive uptrend since October, supported by its 50-day moving average. The company is set to report earnings on Aug. 9.

Trading Central Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 15.8-per-cent annualized return compared with 8.8 per cent for the S&P 500.

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.

Select U.S.-listed utilities

RankCompanyTickerRecent Price (US$)Mkt. Cap. (US$ Bil.) P/EDiv. Yld. (%)YTD Performance (%)1Y Performance (%)
1Suburban Propane Partners LPSPH-N23.781.516.510.123.91.6
2Algonquin Power & UtilitiesAQN-N12.546.124.44.523.730.6
3NorthWestern Corp.NWE-N72.823.717.43.222.625.0
4Black Hills Corp.BKH-N80.374.819.92.527.431.4
5OGE Energy Corp.OGE-N43.128.620.63.49.822.2
6Portland General Electric Co.POR-N55.284.922.42.820.627.7
7Hawaiian Electric IndustriesHE-N44.614.823.42.921.528.9
8Avista Corp.AVA-N45.83.015.23.47.3-9.1
9Spire Inc.SR-N85.524.319.92.814.718.4
10Allete Inc.ALE-N86.54.523.12.713.811.7

Source: Trading Central

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

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