Utilities

Utilities, Real Estate, and Consumer Staples are the bottom three sectors among the GS Scores. 

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We review the somewhat out-of-character performance of the Utilities sector to try to pinpoint what is influencing results. This article touches on several potential drivers for the sector’s relative strength.

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The “robustness” of the “Cheapest Sector Strategy” concept is illustrated by strong results across all rebalancing frequencies.

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Even though the S&P 500 roared ahead by nearly 50% over the last three years, the traditionally low beta slow-growth Utilities sector outperformed during that powerful upswing. Nevertheless, today Utilities seldom look attractive by active managers and calls to overweight the sector are scarce.

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Our analysis of the Bridesmaid effect originated in 2006, but was based on S&P 500 sectors rather than asset classes.

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Following a seven-month stint as the highest-rated sector overall, Consumer Discretionary relinquished the throne to Health Care.

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Consumer Discretionary can’t be topped; it has held on to the highest-rated spot for seven consecutive months. Utilities and Telecom continue to close out the bottom two. 

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An important feature of this bull market—and a reason for its longevity—is the slow recovery in investor attitudes relative to valuation altitudes...

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Consumer Discretionary has held on to the highest-rated spot for six consecutive months. Coming in last (again) is Utilities. After rating among the lowest two positions between April 2017 and April 2018, Energy finally improved and now sits in 6th place—the middle of the pack.

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Are Utilities defensives, or are they interest rate plays, or both? We believe the driving influence fluctuates based on market conditions, specifically fear, and the desire for protection in down markets.

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For months on end, the Dow Jones Utilities has been the only bellwether group not to participate in the parade of new bull market highs.

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A summary table detailing the Attractive and Unattractive sectors and industry groups going into 2017.

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A few months ago, we mentioned the valuation risks that had built up in the stodgy Utilities sector, which at its mid-summer peak commanded a trailing P/E multiple of 24x—almost 10 points above its 1990-to-date median of 14.7x.

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The S&P 500 once again remains on the verge of a new bull market high, thanks in large part to the bubble in another asset class: Bonds.

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Relative valuations of Staples and Utilities sectors already reflect a “flight to quality” effect. Investors looking to add some economic/stock market defense should focus on the cheaper Health Care groups.

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Last month we discussed the negative market implications of May’s “Death Cross” signals in the Dow Transports and Dow Utilities.

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We certainly have nothing against dividends, but for more than a year we’ve believed that high-yielding themes like the Utilities, REITs, and the S&P Dividend Aristocrats have become so popular they’re likely to disappoint their new owners for a while.

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We examine the impact of March’s strong group leadership reversal on the top and bottom of our group model.

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All ten of the S&P 500 sectors recorded a sequential increase in four-quarter trailing net profit margins. But consider where sector margins stand today relative to their 25-year medians. Eight of ten S&P 500 sectors are recording profit margins well above their long-term medians.

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Both models have numerous Information Technology and Financials groups in Attractive territory. Neither model has any Unattractive Tech groups. Alternatively, neither model has any Attractive Utilities groups, while several Utilities rate Unattractive in each.

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