Still Not the Time to Buy Utility Stocks

 | Jun 04, 2013 | 2:00 PM EDT  | Comments
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Utility stocks were the market's punching bags in May.

Of the 10 worst-performing stocks in the Standard & Poor's 500 Index for the month, seven were utilities, or their cousins, the power-generation companies.

FirstEnergy (FE) fell 13% for the month. Exelon (EXC) and Edison International (EIX) were down 12%.  AES (AES) dropped more than 11%. Consolidated Edison (ED), American Electric Power (AEP) and Duke Energy (DUK) all fell 10%.

Is it time to buy? Not yet, in my opinion.

Utility stocks and other income vehicles are falling for three major reasons. First, they are income vehicles and will face increasing competition from bonds when bond yields start to rise. Rumblings in the bond market suggest that time may finally be at hand.

Second, there is increasing evidence of some pep in the U.S. economic recovery. Home prices are rising, jobless claims are falling, and the black cloud of pessimism is slowly lifting. So, investors are gravitating to more aggressive stocks and deserting the defensive stalwarts like the utilities.

Third, the defensive stocks had become overly popular. I outlined my case on this in my April 26 column "Defensive Stocks Ringing a False Alarm."  At that point, utility stocks were up almost 19% for the year. I said that these "pillars of timidity" were selling for well above their traditional valuations.

Because this group of stocks had become too popular and overpriced, it will take a while to work off the excess.  Here is my rough idea of buy prices on the seven utilities mentioned above.

Utility

May 31 Price

Possible Buy Price

AES

$12.20

$9.30

American Electric Power

$45.53

$31.00

Consolidated Edison

$57.07

$38.00

Duke Energy

$66.91

$58.30

Edison International

$45.94

$35.40

Exelon

$31.41

$23.80

First Energy

$39.01

$32.60

As you can see, most of these stocks would have to fall quite a way before I would be interested. I am not a big fan of utility stocks because the companies are heavily regulated, haven't been innovative historically and mostly are mature businesses.

What if these stocks never hit the price points I suggest? No great harm. There is no law that says every portfolio should have some utility representation in it.

If one or several of the stocks do hit my targets, you can bet they will be near friendless at that point. I suggest that would be a good time to buy

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