by Michael Tarsala
Utility stocks can't go up forever.
I had my doubts. I told DeShurko that the run in utility stocks must be getting long in the tooth.
I argued that investors are likely ignoring the underlying growth rates of many stocks in the sector, and simply hiding out there for now, playing them as an alternative to the low yields in money market accounts and U.S. Treasuries.
I pointed him to this chart:
The Utilities Select Sector SPDR (XLU) is extended. Not only that, the relative strength index (the line at the top of the chart) is threatening to roll over from an overbought extreme (a reading above 70).
Yet the XLU is not all utilities, according to DeShurko. Here's what he had to say:
During the first quarter when the S&P was rising, utilities sold off a little bit. Which is natural. But now, utilities that are using natural gas are prime, partly because of the incredibly cheap cost of that energy.
It's true, some of these utilities are now in the 14 to 15 PE ratio range, which is high. But you have to pick and choose in this group. I'm not a fan of the XLU for that reason.
And that 's what we do: we pick and choose. One of the companies in our model is PPL Corp. (PPL), an electric utility. The current PE is about 10 times, and the forward PE on the stock is around 11 to 12 times, with a 5.2% dividend yield.
It's hard for me to argue that a 5%-plus dividend yield stock with a market beta of 0.16 (or 16% the volatility of the overall market) is relatively risky, but I'll let you decide that for yourself.
You can read more about DeShurko's Dividend and Income plus model here.